The Department of Labor’s proposed fiduciary regulation does little to help retirement savers and could actually weaken investor protections, said several state attorneys general, in a comment letter to the DOL this week. The letter echoed a number of other comments submitted by consumer protection organizations and fiduciary advocates, although organizations representing the brokerage industry were fairly supportive of the rule.
The proposed rule, “Improving Investment Advice for Workers and Retirees,” was revealed in late June as the Trump administration’s revision to the Obama administration’s fiduciary rule that was vacated in federal court in 2018. The new rule reinstates a “five-part test” from 1975 that was previously used as a means to determine whether a recommendation should be regulated under the fiduciary status.
The comment letter was signed by attorneys general in California, New York, Connecticut, Illinois, Maryland and the District of Columbia. They argue that reinstating the five-part test would mean many retirement savers would receive advice that would not be held to a fiduciary standard.
“The Department’s actions threaten the financial future of millions of Americans,” the letter says. “They wrongly permit many financial advisers to avoid fiduciary responsibility altogether. And they allow the retirement account advisers that ERISA requires to act as fiduciaries to maintain harmful conflicts of interest. The Department should withdraw this regulatory package and focus instead on a set of rules that truly protects retirement savers, rather than condone conflict-ridden business practices that erode the financial security of hard working Americans.”
In addition to the five-part test, the rule also includes an exemption for fiduciaries dispensing retirement advice. According to the rule, fiduciaries under ERISA can recommend retirement options provided they adhere to “impartial conduct standards,” including a best interest standard and reasonable compensation standard.
But to the states, the exemption allows fiduciaries under ERISA to offer conflicted advice, with forms of compensation that include commissions, 12b-1 fees and revenue sharing payments from investment providers or other third parties. The letter acknowledges that the DOL’s stated intention was to align its rule with Reg BI, but the language of the rule means that even those advisors offering retirement advice that does not meet the five-part test standard would still be able to follow what the states argue is a nebulous best interest standard.
The states also argued that the exemption’s disclosure requirement was flawed by requiring firms to disclose they are fiduciaries under ERISA while exempting them from having to act in a fiduciary manner.
“The Department claims that this disclosure ‘is intended to ensure the fiduciary nature of the relationship is clear to investors,’” the letter read. “But in fact, the result of such a disclosure would be the exact opposite of the Department’s stated intent. Requiring a disclosure of fiduciary status, while exempting firms from the most important requirements stemming from that status, is fundamentally confusing and misleading.”
However, the Securities Industry and Financial Markets Association (SIFMA) supported the exemption, calling the new proposed rule an "improvement" on the DOL's approach when constructing its fiduciary rule in 2016. The Financial Services Institute (FSI), a trade group for independent broker/dealers and advisors, supported the exemption in its own comment letter to the DOL, but also worried that the fiduciary disclosure might cause unnecessary client confusion. By using the term “fiduciary,” the FSI argued, a client may think that a broker giving retirement advice would need to adhere to something “more or different” than Reg BI’s standard.
“This standard of conduct is intentionally consistent with Regulation BI,” FSI wrote. “An additional statement in disclosure to the investor indicating that the Financial Institution is acting as a fiduciary under ERISA will cause investor confusion when the best interest standard, aligned with Regulation BI, applies to those utilizing the Proposed Exemption. The Department should not expand the disclosure requirement further and should consider eliminating this fiduciary disclosure obligation to avoid investor confusion.”
In its own comment letter, Morningstar suggested that a fiduciary disclosure without context may confuse clients further and suggested that the DOL require firms to supply a more robust disclosure akin to the SEC’s new Form CRS to everyone who gets advice on a rollover into an IRA or an IRA account. Additionally, Morningstar believes that the DOL should revise the five-part test to include all rollover advice, including recommendations made on a one-time basis, and the letter argued that the rule left too many unresolved questions around enforcement.
“The DOL should clarify when it will take the lead on enforcement and when it will rely on the SEC to enforce regulations regarding IRA advice,” the Morningstar letter read. “Since the Proposed Rule does not create a private action, unlike the previous rule from 2016, it makes agency enforcement particularly important.”
The North American Securities Administrators Association (NASAA) agreed in its own comment letter that the fiduciary standard should be applied to all rollover advice.
The Financial Planning Coalition, which includes the CFP Board, National Association of Personal Financial Advisors and the Financial Planning Association, also sent in its own comment letter sharing similar concerns about reinstating the five-part test and the prohibited transaction exemption, particularly when they compared it to the CFP Board's newly-enacted Code of Ethics and Standards of Conduct.
Meanwhile, the Consumer Federation of America (CFA) argued that the DOL was rushing the public comment period in its own letter. Previously, the CFA and others had called for a lengthier comment period of 90 days rather than the allotted 30 days, arguing the latter was unreasonably short under normal circumstances, without taking into account the difficulties resulting from the COVID-19 pandemic.
“The Department’s insistence on moving forward on such an artificially rushed schedule suggests that the Department simply isn’t interested in hearing, let alone carefully weighing, the views of those outside the financial services industry with an interest in the issue,” the CFA comment letter read. “As such, it confirms the view that the proposal is designed, not to protect retirement savers’ nest eggs, but to protect financial firms’ profits.”
The DOL rejected requests from some members of Congress to extend the 30-day comment period, according to a comment letter signed by numerous Democrats, including Rep. Bobby Scott (D-Va.), the chairman of the House Committee on Education and Labor, and Sen. Patty Murray (D-Wash.), the ranking member on the Senate Committee on Health, Education, Labor, and Pensions.
The DOL will now take the comments under advisement for potential revisions before the release of the finalized rule.