New Fiduciary Push Faces Longer Odds
January 19, 2015 by Arthur D. Postal, arthur.postal@innfeedback.com
WASHINGTON – A coalition of consumer-oriented public interest groups has created a website designed to mobilize public support for a uniform fiduciary standard in anticipation of a renewed push to expand the standard.
The initiative by the consumer groups this week is the opening bell of what is expected to be a renewed push by the Obama administration and consumer groups to impose a fiduciary standard of care on the advice that insurance agents and other financial professionals provide in selling investment retirements to 401(k) beneficiaries under the Employee Retirement Income Security Act (ERISA).
But the fiduciary push is facing an uphill battle. Besides opposition from the insurance industry and others, the larger Republican congressional majority is also apparently not in favor of expanding the standard.
Barbara N. Roper, director of investor protection for the Consumer Federation of America, said this week that the Department of Labor’s Employee Benefit Security Administration (EBSA) reportedly has a revised rule proposal and economic analysis ready to go to Office of Management and Budget (OMB) for review as soon as they get the go ahead from the White House.
In anticipation of the proposal, the coalition launched SaveOurRetirement.org to educate workers and retirees about what the coalition calls the “retirement advice loophole” and mobilize public support to close it. Its members include AARP, the American Federation of State, County, and Municipal Employees (AFSCME); the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO); Americans for Financial Reform; Better Markets; the Consumer Federation of America; and the Pension Rights Center.
The groups call the current ERISA investment advice standard a loophole, dating back to ERISA’s enactment in 1974. Under the standard, CFA and its allies contend, “Wall Street brokers and other financial firms with major conflicts of interest are allowed to provide investment advice that serves their own interests instead of what’s best for their clients.”
For example, the statement said, “they can sell financial products that pay large commissions but hurt their clients with unnecessary fees, poor returns, or excessive risks. … Some advisers are required to put their customers’ interests first while others are not – and it is often extremely difficult for workers and retirees to know which type of adviser they are dealing with.”
The Dodd-Frank Act (DFA) of 2010 contained a provision opening the door to the Securities and Exchange Commission to impose a uniform standard for sale of investment products. The DOL released a proposal soon after.
Agent and advisor groups lobbied intensely to force scrapping of such a provision, arguing that changing the standard for sale of investment products could effectively eliminate the commission-based model under which they operate. They argued that subjecting them to a fiduciary standard would raise the cost of doing business to prohibitive levels, and that it would affect the captive agent model.
In November, SEC Chairman Mary Jo White said “clarity” will be forthcoming soon on the Securities and Exchange Commission’s next-step on the long-dormant effort to revise the current fiduciary standard.
The DOL will unveil its new proposal, and White also contemplating the SEC’s next step on the issue, against the background of a Republican Party with the wind at its back, in control of the Senate for the first time since 2007 and holding the largest majority of the House since 1929.
Sen. Orin Hatch, R-Utah, has already indicated opposition. He said he plans to re-introduce in the Senate in the coming weeks legislation that includes a provision that returns to the Treasury Department from the DOL jurisdiction over prohibited transaction exemptions for IRAs (noting that Treasury held the authority prior to an Executive Order in 1978), and requires the Treasury to consult with the SEC regarding the standard of care brokers owe to IRA investors. Title III also returns joint jurisdiction to the Treasury and DOL to issue regulations regarding all prohibited transaction rules for employer- sponsored retirement plans.
David Bellaire, executive vice president & general counsel at the Financial Services Institute (FSI) said that, “There has been significant interest in this issue from both sides of the aisle and both houses of Congress.” He said members of Congress have written letters to the White House regarding this issue, and we anticipate Congress will continue to be involved.”
Judi Carsrud, director of government relations for the National Association of Insurance and Financial Advisors (NAIFA), said they expect that DOL will follow through on its promise to re-propose the rule that NAIFA says, “will limit access, education and advice for the middle-America families NAIFA members serve.”
She said NAIFA “supports efforts to assure retirees receive professional, ethical guidance in planning for their retirement,” and will encourage lawmakers and regulators to be certain that all levels of investors have access to affordable, reliable advice.”
Officials of the Insured Retirement Institute (IRI) said they had concerns with the original proposal, namely with its increased costs and complexity, and limited consumer choice.
“If the rule looks like the earlier proposal, I believe there will be strong bipartisan opposition to the rule,” said Lee Covington, IRI senior president and general counsel. “The reason is that original rule would have prevented millions of Americans from having access to professional financial help.”
Roper of CFA has a different view. She said that congressional Democrats working with the White House in December were able to keep a rider off the “cromnibus” that would have limited the DOL’s ability to move forward with rulemaking.
“That’s a very good sign,” Roper said. “While we know that industry and its Hill allies will try to use every trick in the book to foil a DOL rule, their ability to do that is more limited when the White House takes a strong stand.”
Roper also said supporters of the DOL fiduciary stand have seen a shift in sentiments among certain Democrats who earlier suggested that DOL should wait on the SEC to take the lead.
Roper also said that very few Democrats have actually opposed DOL rulemaking.Most who have weighed in have expressed concern that DOL rules not conflict with SEC rules, Roper said.She said the DOL has provided repeated assurances that they will not.
“And, of course, the lack of any meaningful progress at the SEC makes that a weaker argument,” Roper argues.“After all, the SEC has been actively considering whether to move forward with rules for seven years now and still can’t seem to make up its mind.”
Roper said that, as for the SEC, a uniform fiduciary standard appears to have two commissioners opposed to any fiduciary rule (based on public statements from Commissioners Michael S. Piwowar and Daniel Gallagher) and two commissioners who would support a strong fiduciary rule (based on statements from Commissioners Luis A. Aguilar and Kara M. Stein).
“The question is whether Chair White is willing to take a 3-2 vote in favor of a strong rule.” Roper said. “But she has shown lately that she’s willing to take a 3-2 vote when the situation calls for it.”
