Wednesday, September 09, 2020

NASAA asks DOL to put fiduciary rule on ice

By John M. Jascob, J.D., LL.M.

The North American Securities Administrators Association (NASAA) has asked the Department of Labor to delay adopting its proposed fiduciary rulemaking until the agency can evaluate the effectiveness of the SEC’s Regulation Best Interest (Reg BI). In testimony on behalf of NASAA concerning the DOL’s controversial proposed prohibited transaction exemption for investment advice fiduciaries, Ohio Securities Commissioner Andrea Seidt said that American workers should be given "a fighting chance to have a secure retirement future." Accordingly, she requested that the Department defer finalizing the proposed amendment until sufficient data has been gathered regarding the quality of investment advice offered to investors under Reg BI.

During her testimony, Seidt referenced a recent NASAA report providing new data based on a comprehensive benchmarking initiative by state securities regulators, against which the effectiveness of Regulation Best Interest will be measured. That report identified several gaps between broker-dealers and investment advisers with regard to products that are perennial sources of investor complaints. For example, broker-dealers were twice as likely as investment advisers to recommend the purchase of leveraged and inverse ETFs, seven times as likely to recommend private placements, eight times as likely to recommend variable annuities, and nine times as likely to recommend non-traded REITs.

"It is too soon to know if Reg BI will narrow these gaps and bring BDs closer to fiduciary practices more aligned with customer interests. If the regulation works as intended, this is exactly what should happen," Seidt said.

The report stemmed from the creation of a NASAA committee to develop recommendations on implementation strategies following the Fifth Circuit vacating the DOL’s fiduciary rule in 2018 and the SEC’s adoption of Reg BI in 2019. The Committee’s first order of business, Seidt said, was to conduct a comprehensive examination of broker-dealer and investment adviser practices as they stood in 2018 in order to establish a baseline. The committee launched Phase I of the examination in mid-February 2020, with 34 states participating. Responses were collected from more than 2,000 broker-dealers and investment advisers, representing more than 360,000 industry professionals and 68 million retail investment accounts.

Regarding the report’s findings concerning due diligence, Seidt noted that 22 percent of broker-dealers and 13 percent of advisers reported that they do not use investor profile questionnaires, while others reported using questionnaires that omitted key information like investment objective, age, risk tolerance, income, and time horizon. Moreover, only 20 percent of the firms documented their customers’ education level, and less than half documented investor debt. "The Reg BI adoption release says very little about the SEC’s expectations in this area and it is hard to see how American workers are going to be appropriately matched with safe, cost-effective investment options without direct Department guidance in this area," Seidt said.

In addition, less than half of the firms that responded reported providing individualized fee disclosures to investors at the point of sale. Consequently, investors do not realize that they could invest in lower-cost but equally suitable options, leaving the average American worker who retires after 30 years with $100,000 in savings rather than $200,000 or more. "That is just appalling," Seidt testified. "American workers would find these unpleasant truths unacceptable, and the Department should as well."