WASHINGTON — The financial industry and the White House are gearing up for a fresh battle this spring over investment advice for retirement savings.

The Department of Labor issued a draft proposal earlier this month that would require financial advisers to provide retirement savings advice that is in a customer's "best interest" in an effort to minimize conflicts of interest. President Obama and some lawmakers, including Sen. Elizabeth Warren, D-Mass., have backed the rule, but the industry warns that it may prove too complex and could hinder access to retirement advice.

Below is our guide laying out some frequently asked questions about the rule, including why it's important for bankers.


This is the Labor Department's second crack at a plan to impose tougher standards on investment advisers under the Employee Retirement Income Security Act, after withdrawing a 2010 proposal amidst strong pushback from the banking industry and members of Congress on both sides of the aisle.

Previously, some types of advisers had to follow a lower "suitability standard" when offering customers products for their individual retirement accounts. The standard required those products to be appropriate for customers, but critics argued this allowed brokers to steer customers toward investment choices with higher fees and commissions.
Under the new proposal, advisers would assume a fiduciary responsibility, which mandates them to provide advice that is best for the customer. The proposal would require advisers to be more transparent about any commissions or fees they collect, and failure to comply could open financial institutions to lawsuits or arbitration claims.


While the proposal itself is complex, the political messaging in support of the change is straightforward. Advocates for the plan say it helps make Wall Street safer for ordinary Americans — a compelling narrative, given that trust for the industry was shattered in the wake of the financial crisis.

"It shows that anti-Wall Street sentiment is still a great way of selling tougher than expected regulations," said Edward Mills, a policy analyst at FBR Capital Markets. "This late in the game and so far away from the financial crisis, it's still a very potent playbook."

The draft proposal is now garnering even more attention after Warren raised concerns about investment adviser "kickbacks" at a Senate Banking Committee hearing on Tuesday, and launched an investigation into industry practices for selling annuities.

"Annuity agents that are more interested in earning perks than in acting in their clients' best interest can place Americans' savings and retirement security at risk," Warren wrote in a letter to the top 15 annuity providers.

She noted that certain "perks" for advisers with top sales figures, including cash, cruises, iPads and "diamond-encrusted 'NFL Super Bowl Style' rings," could present a conflict of interest in providing the best retirement advice to customers.

The industry's challenge will be to oppose that narrative in a way that highlights its concerns with the proposal. That could prove particularly difficult at a time when so many Americans remain concerned about their own retirement savings and that of their parents.

Dennis Kelleher, president and chief executive at Better Markets, an advocacy group, pointed to a recent study by the White House's Council of Economic Advisors that estimated so-called conflicted advice cost consumers $17 billion per year.

"We have a massive retirement crisis ahead — there are too few people saving and those who are saving aren't doing enough," he said. "You have a tax-subsidized system that's enriching brokers at the expense of retirement savers. Can you think of anything more corrosive to public confidence than that?"
The push to get the rule finalized also comes as President Obama's second term nears its end and all eyes turn to the 2016 elections. The Obama administration has been supportive of the plan, and officials are likely to want to see it finished in the coming months.

"There's certainly a political agenda here that the White House wants for 2016," said Brian Gardner, an analyst with Keefe, Bruyette & Woods. "Conceptually, it's a no-brainer — you're protecting Grandma in Des Moines."


Populist messaging aside, industry observers argue that the rule is incredibly complex and warn that it could ultimately hurt consumers more than help them.

"We're still looking at this rule to make sure middle and lower-income investors are going to have the help they need to prepare for retirement," said Lisa Bleier, managing director of savings and retirement at the Securities Industry and Financial Markets Association. "From what we can see now, there are some definite areas that need to be addressed. We still have some of the same concerns as with the 2010 rule that investors won't have the access they need for advice and the assistance needed for retirement."

More than a dozen banking trade organizations are already asking for more time to weigh in on the draft proposal, given its complexity.

"The proposal comprises a voluminous amount of information and, if adopted, would represent a watershed event touching many facets of the financial services industry," the groups wrote in an April 21 letter, asking for an additional 45 days to submit comments.

Right now, comments are due July 6 — 75 days after the proposal was formally introduced. The Department of Labor intends to hold a public hearing after that time and will then open the record back up for additional comments.

Analysts pointed to other concerns that the plan could raise for investment advisers and general consumers.

"The proposal itself is complex — it's not that easy for professionals, much less laymen to understand," said Gardner.

He added that the investment adviser business could see a shift much like the banking industry has seen following the Dodd-Frank Act, and the difficulties smaller banks have faced complying with the new regime.

"Because scale matters and compliance expenses are scalable, it will be tougher on the smaller advisers than the larger advisers who can absorb the costs," he said.

The change, if finalized, could also be a hit for banks that increasingly rely on cross-selling services like retirement savings advice.
"One of the big questions is, how aggressively or how conservatively are banks or advisors going to implement this rule?" said Mills, who noted that financial institutions remain particularly concerned these days about exposing themselves to fresh lawsuits. "For banks that have been through countless regulatory events over the past seven or eight years, you have to suspect they're a little more cautious than others."

Jaret Seiberg, an analyst with Guggenheim Securities, added in an April 24 note to clients that the complexity of the rule could have unintended consequences for advisers and investors.

"We continue to believe that industry can accept an investor-first requirement," he wrote. "The issue is that this proposal uses an overly complex exemption process to permit financial advisers to get commissions. It creates an absurd situation where an adviser might have to provide services for free if the product does not fit the exemption for a commission payment. And if they refuse to provide the service for free, they could be in violation of the fiduciary duty."


Republicans and Democrats have already laid out concerns with the rule, raising questions about whether Congress will attempt to intervene. It's likely there will be some stirrings to do so, but lawmakers critical of the rule may face an uphill battle in getting something passed.

Rep. Ann Wagner, R-Mo., reintroduced a bill earlier this year that would require the Securities and Exchange Commission to write a similar rule on fiduciary duty that would apply to all investment advice — not just retirement advice — before the Labor Department could take action. The bill has 15 GOP co-sponsors.

The SEC was directed to look into the issue under the Dodd-Frank Act, but has not put forward any guidelines yet. Industry has long pushed the SEC to act first, arguing that it would offer more clarity to the industry and could inform the Labor Department process.

"The industry in some ways wants to harmonize the rules," said Mills. "I think the hope is that when you put it back to the SEC, you have a regulator with a history of working with the financial industry that might be willing to do things that are less impactful to your business."

Still, there's little evidence the agency is poised to act quickly on this issue, raising the question of whether such a mandate would effectively punt the Labor Department proposal to the next president.

While lawmakers could take a standalone vote on the Wagner bill, it's also worth keeping an eye on the appropriations process. Several moderate Democrats in the Senate recently met with the Labor Secretary Thomas Perez to raise concerns with the proposal, but it's not clear whether lawmakers would take such a dramatic stand against the White House if the delay measure came up for a vote.

"It's one of those issues that probably fits into an appropriations bill a little more neatly than other policy matters, because depending on how it's written, you're not writing policy, you're just telling an agency to wait," said Gardner.

The appropriations process could make opposition to the provision more difficult, though it's possible President Obama would still consider a veto to stand up for the Labor Department rule.
Guggenheim's Seiberg added in an April 28 note to clients that Congress has a "real problem when it comes to the timing for legislation."

Lawmakers are not expected to take up appropriations legislation or a debt ceiling deal — another possible vehicle for a delay provision — until this fall, at which point officials may be close to finishing the rule or even done with it.

"There is even some risk that the threat of legislation could cause Labor to accelerate its rule writing. This could mean Congress would be barring Labor from enforcing a rule on its books," Seiberg wrote. "That could impede the Labor Department, but we question if Congress could use a spending bill to prevent investors or class action lawyers from enforcing the fiduciary duty rule. In short, Labor could accelerate its rule writing to negate many of the benefits of legislation."

Victoria Finkle is American Banker's Capitol Hill reporter.

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