Concerns about over-regulation and accusations of industry cynicism led the opening of the Labor Department's hearings on its proposal to impose fiduciary requirements on retirement advisers the latest phase of its contentious process to craft new rules on consumer protections.
Throughout the week, the DOL will hear from a variety of investor advocates, academics and representatives of various industry sectors that would be affected by the fiduciary rules, which the department says are necessary to protect retirement investors from conflicted advice that might not be in their best interest.
All told, the Labor Department is planning 25 panel discussions this week in a four-day session, and is reopening the record for public comments. The record will remain open for about two weeks following the publication of the transcript of the hearings, according to Timothy Hauser, a deputy assistant secretary at the DOL.
Hauser explained that the department is "interested in developing the public record as fully as possible," and cautioned that viewers should not make any inferences on the government's position based on the way officials ask their questions.
Indeed, throughout the years-long process of developing the rule, DOL officials all the way up to the secretary have insisted that they are open to refining the provisions of the fiduciary obligations to make them more workable for brokers and other industry practitioners, so long as the investor protections aren't watered down.
Phyllis Borzi, the assistant secretary of labor who has been leading the development of the rule, explained that DOL is driven by a "very straightforward goal to align the best interests of the customer with those of the adviser and the firm."
So the one overarching and nonnegotiable goal is to create an enforceable standard requiring advisers to put their clients' interests ahead of their own. "That is our north star," Borzi said.
The vehement industry opposition to the DOL's proposal has not focused on the best-interest standard, which critics have generally agreed is a worthwhile goal. But many business groups have challenged the Labor Department on the grounds that the rule as written would be unworkable a favorite industry talking point and would carry a host of negative consequences that could leave millions of low- and middle-income investors without advice as brokers would be compelled to abandon that market.
Specifically, critics have characterized the fiduciary framework as a full-out assault on the commission-based model, common to brokers who work with smaller plans and investors that don't have access to the fee-based advice provided through the RIA channel.
The Labor Department's proposal offers a path for advisers to serve retirement investors through commissions or with other compensation models that would be deemed conflicted, but it would require them to enter into a contractual arrangement with the client at the outset of the relationship. That best interest conflict exemption, known as the BIC exemption or BICE, and the principal trading exemption have become a focal point of industry opposition.
"Our concerns are not with the best interest standard," said SIFMA President and CEO Kenneth Bentsen, who called for the SEC, rather than the DOL, to adopt a uniform fiduciary standard that would apply to brokers and advisers serving all clients, not just retirement savers.
"Rather we disagree with the process whereby one agency is developing yet another standard that will apply to only one sector of the retail investment market," Bentsen said. "It simply makes no sense that the government would not develop a holistic standard."
Bentsen takes issue with the "onerous compliance regime" that would result from the DOL's proposal, which would require advisers to make significant new disclosures about compensation and other issues.
Moreover, he anticipates that the overlapping regulatory requirements, new liability risks and an impractical set of exemptions will drive many brokers out of the retirement sector altogether, or drive them to move high-end clients to fee-based accounts while severing ties with the lower-end investors who receive advice on a commission basis.
"The bifurcation of standards will create confusion for both investors and providers who must comply. We believe the rule as drafted will reduce choice and increase cost, and individual savers will have a more complex and confusing landscape," Bentsen said. "In fact the new best interest contract exemption and principal trading exemptions are so complex that a number of firms have concluded that they cannot be made operational as designed."
Advocates of stronger fiduciary protections, including some industry representatives, see the threat that firms will abandon the retirement market as a bluff, that those groups are offering up a red herring in a cynical bid simply to dodge further regulation.
"We believe that the re-proposed rule can work for advisers," said Marilyn Mohrman-Gillis, managing director of public policy and communications at the CFP Board.
Mohrman-Gillis recalled the industry opposition to the fiduciary framework that the CFP Board developed in 2007, which included provisions concerning best-interest advice, identifying and mitigating conflicts of interest, and entering into a contract with clients.
Despite the dire predictions that those rules would be incompatible with common business practices, she argued that the subsequent history during which the number of CFPs, many of whom serve some accounts on a commission basis, has risen sharply has shown that the CFP Board's standard was hardly the death knell for the industry that some predicted.
"In short CFP professionals today are operating under these BIC-like requirements with commission-based, not just fee-based, [models]," she said.
The idea that firms would simply walk away from the hugely significant retirement market for mid-market advisers is "simply not credible," according to V. Raymond Ferrara, chairman and CEO of ProVise Management Group.
"For anyone claiming that they are unable to serve the middle class clients under the re-proposed rule," Ferrara said, his firm and many others "would be happy to fill the gap."
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