Wall St. watchdog says Labor Department broker rule ‘not the way to go’
May 27, 2015 by Suzanne Barlyn
A U.S. Labor Department plan to reduce conflicts with brokers who offer retirement account advice drew criticism from the chief of Wall Street’s self-funded regulator on Wednesday, who said it would shift enforcement from regulators to investors.
The plan, unveiled in April, aims to ensure that brokers offering retirement account advice do not steer customers into high-fee products that boost brokers’ commissions. Brokers would sign contracts, promising to act in investors’ best interests.
The remarks by Richard Ketchum, the Financial Industry Regulatory Authority’s (FINRA) chairman and chief executive, could help bolster the arguments of the brokerage industry which has been fiercely lobbying against the Labor Department’s rulemaking effort.
“It is “not the way to go,” said Ketchum in prepared comments at the watchdog’s annual conference.
The Labor Department’s plan “would leave enforcement entirely to investors who feel they’re wronged,” Ketchum told reporters. Investors who believe their retirement account brokers did not meet the standard would have to file arbitrations or class action lawsuits to enforce the contracts, Ketchum said.
A Department of Labor spokesman said the agency was collecting feedback.
“We are in the midst of the public comment period and hope that these and other concrete suggestions of how to improve the proposal will be submitted for the record,” the spokesman said.
FINRA, Wall Street’s industry-funded watchdog, oversees more than 638,000 brokers.
The U.S. Securities and Exchange Commission is the “right agency” to develop a best interest standard, Ketchum said. However, designing such a standard would be “challenging.”
Industry rules now require Wall Street brokers, who register with FINRA, to recommend investments that are “suitable” for investors, based on factors such as their age or risk tolerance. Investment advisers who register with states and the SEC, however, must act as “fiduciaries,” or in clients’ best interests.
A Labor Department fiduciary rule that applies to retirement accounts would lead to “bifurcated rules” instead of a uniform policy that covers all types of brokerage accounts for individual investors, said the Securities Industry and Financial Markets Association in a statement on Wednesday.
Ketchum has long believed that a broker fiduciary standard “is the direction we must go,” he said.
Nonetheless, he was “disappointed” by “recent rhetoric about the broker-dealer industry and its regulation that accompanied the Labor proposal.” He later declined to identify or elaborate the sources of that rhetoric.
In February, however, the Labor Department plan gained a higher national profile when President Barack Obama announced his support. He said it would protect investors from being steered into costly retirement investments that produced high commissions for brokers but low returns for investors.
Some investor advocacy groups fired back at Ketchum in statements.
“It is revealing, but not surprising, that the head of Wall Street’s self-regulator would be against requiring Wall Street’s brokers to act in their clients’ best interest rather than in the brokers’ own economic interests,” said Dennis Kelleher, president and chief executive of Washington-based Better Markets.
Wall Street conflicts of interest cost investors $17 billion a year, Kelleher said.
(Reporting by Suzanne Barlyn; Editing by Jeffrey Benkoe, W Simon and Andrew Hay)
