The Labor Department is hearing an earful from industry groups, consumer advocates and lawmakers about its new
The criticism is wide-ranging, with industry groups warning that it will automatically impose a presumption of fiduciary status on financial professionals, while others blast the regulation for failing to enact meaningful consumer protections.
Still others take issue with the process by which the Department of Labor advanced its proposal, with a 30-day comment period on the proposed rule ending Aug. 6. Its Obama-era predecessor had a 90-day comment period and three and a half days of public hearings.
The latest
It also comes as a replacement for the Labor Department's vacated fiduciary rule from 2016, a stricter standard that was widely reviled by the brokerage industry and succumbed to a court challenge led by Eugene Scalia, who was a private attorney at the time and today serves as Labor secretary.
Bankers were largely supportive of the department’s proposed exemptions permitting adviser fiduciaries to receive compensation for investment advice, which was otherwise prohibited under ERISA. But they raised concerns that the exemption is too limited.
“We commend the Department for its efforts to promote fiduciary investment advice that is intended to meet the needs of retirement investors while preserving the availability and variety of investment advice arrangements,” said Timothy Keehan, vice president and senior counsel of the American Bankers Association, in an Aug. 6 comment letter. “The Exemption’s provisions generally work toward achieving transparency and compliance certainty while providing exemptive relief that is broader than currently available exemptions.”
But the ABA urged the department to exclude banks from CEO certification requirements, arguing that banks and broker-dealers have differences in their business models and that the certification requirement for banks would be “significantly onerous.”
The trade group also said recordkeeping requirements to be subject to the National Bank Act restrictions on accessing banks’ information, to ensure that only the Office of the Comptroller of the Currency or a representative from the OCC “may exercise visitorial powers” with respect to national banks.
Bank of America asked the Labor Department to remove a provision that would require written acknowledgement of fiduciary status, as well as a provision that would potentially force bank employees to seek advice from a third-party institution.
"The Proposed Exemption's overall consistency with Reg. BI represents a welcome; and productive, step toward facilitating the provision of non-discretionary investment advice by fiduciaries subject to the Employee Retirement Income Security Act of 1974," said Patricia Anne Kuhn, managing director and associate general counsel at Bank of America, in an Aug. 6 comment letter. "However ... the Proposed Exemption includes a number of troublesome conditions that may hinder broad adoption by financial services firms."
The Financial Services Institute, one of the groups that sued to bring down the Obama-era fiduciary standard, is broadly supportive of the Labor Department's new proposal, though not universally so.
The group takes aim at disclosure provisions requiring firms taking advantage of the prohibited transaction exemption to inform clients that they are fiduciaries under ERISA. That is at odds with the SEC's calculated decision not to use the term "fiduciary" in Reg BI, and the Financial Services Institute cautions that the Labor Department's disclosure policy "will lead to investor confusion and even be misleading (resulting in disqualification under the exemption), particularly in the IRA setting where ERISA's enforcement standards do not apply."
Another area of contention concerns the language in the rule's preamble that groups like the Financial Services Institute and the American Council of Life Insurers warn could be interpreted to broadly presume a fiduciary duty for retirement advisers in much the same way that the earlier, defunct fiduciary rule did.
"[I]t is critical that consumers retain access to both fiduciary and non-fiduciary services,” the life insurer group said in its comment letter. “We are concerned that the department's commentary ... could be understood to broadly impose fiduciary obligations in a manner similar to the Department's 2016 fiduciary regulation."
Critics from the other side argue that the rule doesn't go nearly far enough, and in fact even amounts to a loosening of investor protections.
"The DoL will once again allow financial professionals to provide conflicted advice and benefit themselves, rather than requiring that they put retirement investors' interests first," charges the Public Investors Advocate Bar Association.
In particular, the investor advocacy group and other critics take issue with the Labor Department for reviving the five-part test to determine when someone will be deemed a fiduciary under ERISA. Critics say that standard, enacted in 1975, has failed to keep pace with the way that investment advice has evolved, allowing many advisers to escape fiduciary responsibilities.
"[M]any who provide investment advice will not meet all five parts of the test, thereby never being deemed investment advice fiduciaries," the Public Investors Advocate Bar Association said in its comment letter. "Those advisers will continue to be allowed to be influenced by conflicts of interest and engage in transactions that would be prohibited if those same advisers were fiduciaries."
The Financial Planning Coalition, which consists of the National Association of Personal Financial Advisors, Financial Planning Association and the CFP Board, leveled similar criticism, contending the proposed regulation fails to provide clients with protection consummate with how advice is delivered today. The coalition says it's increasingly difficult for consumers to tell salesmen apart from and advisers.
"A clear fiduciary standard, equally applied to all financial professionals who provide retirement investment advice, has become a necessity to protect investors in today’s rapidly evolving marketplace," the coalition said in its comment letter to the department.
A Labor Department spokesman did not respond to a request for comment on the criticisms of the proposal.
Many Democratic lawmakers have also chimed in, blasting the proposal both for relying on the five-part test and for choosing not to include a private right of action that would allow clients to sue if they felt like their adviser violated the rule.
But they also took issue with the quick pace by which the department has been advancing the rule. Last month, Sen. Patty Murray, D-Wash., sent a letter to the acting head of the Employee Benefits Security Administration asking for a public hearing on the proposal and an extension of the comment period, requests that the department did not grant.
"I'm incredibly frustrated that the Trump administration is charging ahead so recklessly with a proposal that could lead to retirement savers losing billions of dollars a year due to conflicted advice," Murray said in an emailed statement. "There is no reason for the department to rush this process when so many stakeholders have been clear they want more time to raise their concerns, and seemingly no grounds for Secretary Scalia to move forward on some of these proposals without a hearing as required by law."
