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From Securities Regulation Daily, February 23, 2015

Obama pushes DOL to extend fiduciary standard to retirement advisers

By Anne Sherry, J.D.

The President is directing the Department of Labor to take on rules to mitigate conflicts of interest in investment advice by expanding the fiduciary standard. The rulemaking, first proposed in 2010 but defeated the following year, is back on the Department’s agenda after the President’s remarks today at AARP headquarters. Opponents, including SEC Commissioner Daniel Gallagher, point out that retirement accounts are already subject to robust regulation by the SEC and FINRA.

The cost of conflicts. A White House fact sheet contends that current rules do not ensure that financial advisers act in the best interests of their clients when giving retirement investment advice, instead allowing advisers to take backdoor payments and hidden fees, eroding retirement accounts. The Council of Economic Advisers today released a report finding that conflicted investment advice reduces savers’ investment returns by about 1 percentage point per year. With approximately $1.7 trillion invested in IRAs, the Council estimates that the annual cost of conflicts of interest is $17 billion.

Proposal. The proposal has not been released, but the 2010 proposal would have more broadly defined as fiduciaries those persons who render investment advice to plans and IRAs for a fee within the meaning of ERISA and the Internal Revenue Code. According to the White House fact sheet, the new proposal will permit private firms to continue to set their own compensation practices by creating a principles-based exemption from limits on payments creating conflicts of interest. It will also allow advisers to continue to provide general education on retirement saving across employer-sponsored plans and IRAs without triggering fiduciary duties.

Opposing views. At the SEC Speaks conference last week, Commissioner Gallagher called the reproposal a sequel that is “probably more like Goonies 2 than Godfather 2.” The commissioner said that the rulemaking is based on the unproven premise that an entire industry regulated by the SEC is plagued by conflicts of interest. He also said that the Department of Labor’s failure to engage the Commission in the rulemaking process and the impact it may have on investors is “curious” given the SEC’s oversight authority in the area and, indeed, Dodd-Frank’s mandate that the SEC study the effectiveness of the existing regulatory standards of care for brokers and advisers. Following a point-by-point rebuttal of a leaked White House memorandum, Commissioner Gallagher concluded that investors and markets are better off when conflicts are managed through disclosures or otherwise, as the SEC has done for over eight decades.

SIFMA also spoke out against the proposal. In a statement issued today, SIFMA head Kenneth E. Bentsen, Jr. said, “While we cannot comment on a proposal we have not yet seen, we have ongoing concerns that the DOL regulation could adversely affect retirement savers, particularly middle class workers. The new regulation could limit investor choice, cause inconsistencies as different regulators would apply different standards to the same retirement accounts, prohibit access to investor guidance, and raise the costs of saving for retirement.” The brokerage industry, including retirement accounts, is already highly regulated by the SEC and FINRA, Bentsen said, and on social media, SIFMA expressed ongoing concerns that the Department of Labor and White House are ignoring that existing regime.

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