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From Securities Regulation Daily, July 23, 2015

Gallagher submits comment letter to DOL criticizing its fiduciary duty proposal

By Jacquelyn Lumb

Commissioner Daniel M. Gallagher fears the Department of Labor’s proposed rule on conflicts of interest and fiduciary duty is a “fait accompli,” but this week submitted a comment letter to explain why he believes it will harm investors and the capital markets. He also issued a statement in which he said he hopes and expects that the DOL will consider his views in connection with what he characterized as an ill-advised rulemaking.

Differing fee structures. Gallagher said the proposal is based on a misguided view that charging fees based on the amount of assets under management is superior to charging commission-based fees. The proposal dismisses suitability as a proper standard of care for brokers and FINRA’s arbitration system as a means of resolving disputes between financial professionals and their clients, he wrote.

He expressed concern that broker-dealers that use a commission-based fee structure will find it nearly impossible to comply with the numerous prohibitions and exemptions in the DOL proposal and, as a result, will stop servicing certain retirement accounts. Gallagher predicted that high net worth broker-dealer clients will be moved into fee-based advisory accounts where they will pay a premium over the existing commission structure, while less wealthy clients will be dropped or moved to “robo-advisers.” He warned that the proposal will likely harm those it is intended to help.

Conflicts of interest. In substituting its judgment for that of investors, Gallagher said the DOL ignores the benefits of a disclosure-based approach for mitigating conflicts of interest. He said investors benefit from having choices of products and advisers, and from making their own decisions.

Potential SEC rulemaking. Gallagher noted that some believe the SEC could stave off the DOL’s rule with rulemaking of its own under Section 913 of the Dodd-Frank Act. SEC Chair Mary Jo White expressed her view earlier this year that the SEC should move forward with a uniform fiduciary duty rule. Section 913 gives the SEC the authority to adopt a rule with respect to a broker-dealer’s standard of care when providing personalized investment advice to a retail customer. Under Section 913, the standard can be no less stringent than that which applies to investment advisers and it requires that conflicts be disclosed and consented to by the customer. It also permits commission-based fees.

However, Gallagher said that compliance with an SEC rule would not mean compliance with the DOL rule. If the SEC moves forward with rulemaking, he said the industry will likely have two burdensome and redundant rules with which to comply. The agencies could have coordinated their rulemaking process, he added, but the DOL has shown a lack of concern for the SEC’s views. While the agencies have had interactions with respect to the fiduciary proposal, Gallagher said the discussions have “borne no fruit.” The DOL proposal does not even mention the possibility of SEC rulemaking or the SEC’s existing rulemaking regime for broker-dealers and investment advisers.

Substituted compliance. Gallagher said the DOL should have considered a type of substituted compliance mechanism in which compliance with the SEC’s fiduciary standard would satisfy DOL rules. The DOL also could have worked with the SEC to develop a disclosure-based solution to the alleged excessive fee problem, he said.

Plea to abandon proposal. Gallagher called on the DOL to abandon its fiduciary proposal and work with the SEC to address its concerns about broker fees for retirement accounts. He urged both agencies to focus on a disclosure regime that will allow brokers to offer a menu of services to investors of all sizes.

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