Wednesday, July 22, 2015

SIFMA Raises ‘Deep Concerns’ Over DOL Retirement Fiduciary Rule

By Anne Sherry, J.D.

The Department of Labor is the wrong regulator to impose a fiduciary standard on retirement advisors, according to SIFMA. The industry group, which favors a best-interests-of-the-customer standard, submitted eight comment letters on the DOL’s proposal to redefine fiduciary under ERISA, arguing that the proposal is unworkable and that SEC and FINRA should remain in the lead on the issue.

Background. The DOL issued its proposal in April at the President’s urging to reduce conflicts of interest and hidden fees that the White House said cost retirement accounts $17 billion annually. The proposal brings within the definition of “fiduciary” any individual receiving compensation for providing advice that is individualized or specifically directed to a particular plan sponsor, plan participant, or IRA owner for consideration in making a retirement investment decision. The DOL also issued proposed exemptions along with the proposed rule, notably a “best interest contract exemption” that would allow fiduciary advisers and their firms to collect fees that would typically be unavailable to them, as long as they acknowledged their fiduciary status.

Comment letters. SIFMA’s comment letters address the fiduciary rule and the best interest contract exemption, as well as four prohibited transaction class exemptions (principal transactions in debt securities, PTCE 86-128, PTCE 84-24, and PTCE 75-1, Part V) and the rule’s other exemptions. The eight letters, which include one from the SIFMA Asset Management Group, draw support from a NERA study responding to the DOL’s regulatory impact analysis and a Deloitte report addressing the operational impact of the rule proposal.

Fiduciary rule. The group maintains that the expanded definition of fiduciary would leave investors without investment guidance in several areas. Investors would no longer be able to discuss the types of services that an advisor may provide should they choose to work together, and providers would no longer be able to pitch their services to small business owners, as these would be seen as fiduciary conversations. The rule would also restrict conversations about rollovers when investors change jobs.

Exemptions. In its executive summary on the comment letters, SIFMA said that “it should be clear from the outset that virtually all of the exemption amendments, as well as the new exemptions, are not administrable, as required under ERISA.” The best interest contract exemption is unworkable, SIFMA writes, because it both obstructs broker-dealers and imposes disclosure requirements that would overwhelm customers, impede transactions, and create losses for certain retirement accounts forced to sell asset that DOL deems “unworthy.”

Regulatory and operational impacts. SIFMA cites two studies to undermine the DOL’s regulatory impact analysis and demonstrate the operational impacts of the proposal. A study by NERA Economic Consulting finds that commission-based accounts do not underperform fee-based accounts and that most retirement holders would lose access to financial advice under the rule. The DOL also underestimated the cost of complying with its proposal, SIFMA wrote, by relying on data that SIFMA submitted to the SEC two years ago under assumptions specific to a contemplated SEC fiduciary rule. Finally, a Deloitte report commissioned by SIFMA finds that several requirements of the proposal would be unfeasible or impossible for firms to operationalize within their existing frameworks. The total startup costs for large and medium broker-dealers would be $4.7 billion, and ongoing costs would exceed $1.1 billion—nearly double the DOL’s estimates.

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