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From Banking and Finance Law Daily, February 24, 2015

Labor Department to crack down on retirement advice conflicts of interest

By Katalina M. Bianco, J.D., and J. Preston Carter, J.D., LL.M.

President Obama has directed the Department of Labor to move forward on a proposal that would address “conflicted and bad retirement advice.” President Obama, speaking at the AARP, said that rulemaking is necessary “to protect hardworking families’ retirement security.

Obama noted that Social Security often is not enough on its own to get people through their retirement and many workers do not have traditional pensions. Those who have prepared for retirement by saving throughout their working life should be getting a fair return on their investments, he said. Therefore, the Administration is looking to ensure that those investments are protected.

As a post to the White House blog puts it, “what's legal is often the worst scandal.” Under the current system, financial advisors can receive backdoor payments or hidden fees for steering people into bad retirement investments that have high fees and low returns. These backdoor payments and hidden fees benefit Wall Street firms but harm the clients, according to the post.

Proposal. According to the White House, the problem in the industry is that “there are no uniform rules of the road that require retirement advisors to act in the best interests of their clients—and that’s hurting millions of working and middle-class families.” On average, conflicts of interest issues result in annual losses of about one percentage point for affected investors. While that may sound minor, the post stated, it quickly adds up.

A White House fact sheet provides details on the upcoming proposal. The proposal would mandate that retirement investment advisers put the interests of their clients over their own profits. The new rule would expand the types of retirement investment advice subject to the Employee Retirement Income Security Act.

The DOL intends to issue a notice of proposed rulemaking, beginning a process in which it will seek extensive public feedback on the best approach to modernize the rules on retirement advice and set new standards, according to the White House.

Cordray remarks. In prepared remarks for the AARP event, Consumer Financial Protection Bureau Director Richard Cordray said that the retirement savings market “can be complicated and confusing.” Many consumers rely on professional financial advice when making decisions about retirement savings, so it is critical that they can trust those advising them, he said. Advisors may be receiving hidden payments for steering consumers into more expensive retirement investments, and consumers “may not even realize how much money is being skimmed off the top of their retirement savings by biased advice and mystery fees.” “Sometimes bad advice can be even worse than no advice at all,” Cordray said.

Congressional approval. A number of members of Congress responded to Obama’s speech. House Democratic Leader Nancy Pelosi (D-Calif) said, “Holding financial advisors to a ‘fiduciary’ standard is a long overdue step that will strengthen the retirement security of every American.”

Rep. Maxine Waters (D-Calif), Ranking Member of the Financial Services Committee, applauded the President “for taking this important step towards a financial system that expands opportunity and financial security for all Americans.”

Senator Cory Booker (D-NJ) said that the rules protecting retirement savings—written before the days of 401(k) and other retirement plans—are outdated, resulting in bad incentives and bad advice that have cost American families saving for retirement billions of dollars every year. “It’s common sense that those who are entrusted to provide Americans with investment advice should have a duty to put their clients first,” he added.

Speaking at the AARP event, Rep. John K. Delaney (D-Md) stressed how recent economic and policy trends have made saving for retirement more difficult and underscored the need to protect hard-working Americans from receiving investment advice that is not in their interest. “Retiring with dignity and economic security is becoming more difficult than ever, which means it is absolutely essential that we protect middle-class investors from receiving deliberately harmful advice,” he said.

Congressional Progressive Caucus Co-Chairs Reps. Raúl Grijalva (D-Ariz) and Keith Ellison (D-Minn) released a statement applauding the White House announcement. “When workers leave a job, they can be encouraged to roll over their low-cost, quality employer-based retirement account into an IRA. Too frequently, working Americans do not realize the IRA they are being offered is actually a product that they are being sold,” the Congressmen said. “Seniors are facing choices that will determine the security of their retirement. The rule proposed today improves the retirement investment marketplace and requires financial advisors and broker dealers to work in their client’s best interests.”

Congressional opposition. In a press release, Rep. Ann Wagner (R-Mo) stated that “Today the Department of Labor along with the Obama Administration is doubling down on a misguided proposal that will negatively impact low- and middle-income Americans’ ability to save for their retirement. This rulemaking will only end up harming the very people that it aims to protect by limiting access for Americans who are seeking advice from their financial advisers on retirement decisions.” Wagner added that she plans on introducing legislation that will “preserve options for Americans to obtain financial advice and empower families to be able to properly save for their retirement and their family’s future.”

Industry applause. The Save Our Retirement coalition—AARP, AFL-CIO, AFSCME, Americans for Financial Reform, Better Markets, Consumer Federation of America, and Pension Rights Center—applauded President Obama’s support for the DOL’s proposed rule as a “major step forward to protect consumers.” The groups said, “the rule is needed to help protect Americans’ hard earned retirement savings from advisers who recommend investments based on their own interest—such as those that pay generous commissions—not because they serve their clients’ best interest.”

Dennis Kelleher, President and CEO of Better Markets, stated that a 40-year old “legal loophole” is costing workers and retirees billions of dollars in lost retirement savings every year. “President Obama’s action today will help close that loophole and require all advisers to act in their clients’ best interest,” he said.

The Consumer Federation of America Director of Investor Protection Barbara Roper said, “At a time when the nation already faces a retirement crisis, gaps in regulatory protections make it all too easy for financial services firms and their so-called advisers to profit at their customers’ expense … By closing loopholes in the current regulations and subjecting all retirement investment advice to a fiduciary duty to act solely in the best interests of the client, a well-crafted DOL rule has the potential to save millions of Americans billions of dollars each year.”

Lisa Gilbert, Director, Public Citizen’s Congress Watch Division, welcomed White House support for a “new fiduciary standard designed to protect responsible investors from Wall Street brokers who are putting their own bottom lines ahead of their clients’ welfare.” According to Gilbert, “hidden fees and commissions combine with second-rate investments to leave aging workers with significantly less money for retirement than they might otherwise have.”

Mario Salazar, Legislative Director for U.S. PIRG., said, “Workers who spend their entire careers saving for their retirement should have the peace of mind that they are not being exploited by the financial professionals they hire to provide them with sound financial advice.”

Industry opposition. A Financial Services Roundtable release stated that the proposed new rule “could make it more difficult for millions of Americans to access retirement savings investment guidance.” “While concerns about improper actions by investment advisors should certainly be addressed, an overly broad proposal could price professional financial guidance beyond the reach of many modest income families,” said FSR President & CEO Tim Pawlenty. “A sledge hammer is not needed where a regular hammer would fix the problem without causing unintended damage.”

The FSR pointed to a memo by the law firm of Debevoise & Plimpton providing additional background on how a new rule regarding investment advice could limit many American workers’ access to financial guidance, investment products and professional retirement planning.

Attorneys: Debevoise & Plimpton

Companies: AARP; AFL-CIO; AFSCME; Americans for Financial Reform; Better Markets; Consumer Federation of America; Financial Services Roundtable; Pension Rights; Public Citizen; U.S. PIRG

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