The Department of Labor this week issued guidance for
advisors that seemed to take a tough stance on conflicts of interest as it
interpreted the Trump-era exemption for fiduciaries operating in the retirement
space.
Tuesday's announcement from the department drew praise from
some investor advocates, who hope that the Labor Department and SEC will move
to tighten advisor standards and crack down on conflicted advice. While
proponents of stronger advice standards opposed the rules the DoL and SEC
produced in the previous administration, clarifying guidance to strengthen
those provisions could be a faster path to enhance investor protections than
restarting a lengthy and politically contentious rulemaking process to write
new regulations or amend old ones, advocates say.
One of the two documents the DoL issued this week is billed
as a guide for retirement investors to choose an advisor, offering a series of
questions to ask prospective advisors about their fiduciary obligations, the
fees they charge, and how they navigate conflicts of interest.
The other document is a series of frequently-asked questions
to comply with the prohibited transaction exemption. That’s the waiver that set
the rules for advisors to receive payments for conflicted retirement advice
they offer as fiduciaries under the Employee Retirement Income Security Act.
That rule was adopted by the DoL in December 2020, and took effect in February.
"The retirement investor guidance provides helpful
information regarding the importance of selecting an investment advice provider
who is a fiduciary and the protections that are provided to retirement
investors under the ... exemption," Ali Khawar, acting assistant secretary
of labor for employee benefits security, says in a statement. "The
compliance-focused frequently asked questions provide assistance to financial
institutions and investment professionals as they ramp up compliance with the
exemption."
The years-long battle over ERISA fiduciary standards has
been contentious, with industry groups leading an ultimately successful legal
campaign to defeat an Obama-era rule. In the waning days of the Trump
administration, the Labor Department adopted a replacement that investor
advocates like Barbara Roper opposed, saying it failed to adopt specific,
meaningful protections, and instead aligned with the SEC's Regulation Best
Interest advice standard for brokers, another framework opposed by Roper and
other advocates.
Roper, director of investor protection at the Consumer
Federation of America, says that the DoL's initial rule seemed "to look to
the weak, undefined, non-fiduciary best interest standard from Reg BI to
satisfy ERISA's high fiduciary standard."
"Importantly, however, DOL retained its authority to
interpret and enforce the standard," Roper says in an email. "This
guidance from the DOL shows how meaningful those standards can be in the hands
of a regulator intent on reining in abusive industry conduct."
In particular, she praises at the DoL's guidance on
mitigating conflicts of interest and its commentary on payout grids In the
documents, the department acknowledges that conflicts involving compensation
are unavoidable, but also directs firms to ensure that advisors' incentives are
aligned with those of their clients as much as possible.
"As we have said repeatedly, reining in harmful
incentives is the key to solving this problem, and the DoL has hit this one out
of the park," Roper says.
In addressing conflicts, the DoL guidance looks at the issue
both from the perspective of the individual advisor and at the firm level,
saying that the requirement to mitigate conflicts "extends to the
financial institution's own interests, including interests in proprietary
products and limited menus of investment options that generate third-party
payments."
Knut Rostad, president of the Institute for the Fiduciary
Standard, calls the introduction to the question on mitigating conflicts of
interest that could misalign an advisor's incentive from their clients
"excellent," and sees in it support for his longstanding contention
that the current business model of the brokerage sector is fundamentally
incompatible with strong fiduciary principles.
"It acknowledges the great challenge of infusing
fiduciary conduct into a broker-dealer model designed and built to distribute
products," Rostad writes in an email.
Roper and Rostad hope that Tuesday's DoL release will be a
down payment on more guidance to come from the department and the SEC that
would strengthen advice standards.
Not all advisors feel the same way.
WealthWise Financial Services CEO Loreen Gilbert lauds the
DoL's PTE for fiduciary retirement advice, but would like to see the regulators
take a pause before adopting more stringent interpretations of their existing
rules.
"We hope there is not more guidance from both the DoL
and the SEC," she says, warning of the potential for "more confusion
and bureaucracy created if both the DOL and the SEC get involved."
"There continues to be a battle between the DOL and the
SEC on who defines the rules," she says.
Rostad, meanwhile, would like the DoL to come forward with
some specifics to bolster the provisions concerning conflicts in the prohibited
transaction exemption for fiduciary retirement advice.
"[T]to fulfill the fiduciary mission of the exemption,
additional guidance with required concrete practices is essential," Rostad
says. "Anything less is bound to fail."
As for the SEC's Reg BI, he argues for it to be renamed
"New Suitability," arguing that it's not a great departure from the
previous, longstanding benchmark for broker conduct. Going forward, he hopes to
see amendments to the rule, which he says "cannot be fixed from new
guidance and enforcement alone."
Roper, meantime, is hopeful that the SEC will push out
interpretive guidance to clarify how it will interpret and enforce the central
pillars of Reg BI concerning recommendations and mitigating conflicts.
In a statement, the DoL positions the new guidance as only
the first document in an ongoing review of "issues of fact, law and policy
related to the exemption, and more generally, its regulation of fiduciary
investment advice," suggesting that more will follow.
Then on Wednesday morning, the Senate voted to confirm Gary
Gensler as chairman of the SEC, giving the regulator a full panel of
commissioners and inviting the prospect that the agency will follow the DoL's
lead and begin moving to strengthen Reg BI.
"The guidance is an important first step forward,"
Roper says, "but there’s still a lot of work to be done."
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