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(Reuters) Monday, Sept. 19, 2011 — The U.S. Department of Labor on Monday withdrew a controversial proposal to subject financial professionals to a higher standard of care when advising companies on their retirement plans, bowing to pressure from securities industry groups and lawmakers.
The Labor Department, which has jurisdiction over retirement plans, said it will repropose the rule early next year. As currently written, it would have imposed a fiduciary standard that requires brokers and other advisers to put their clients' interests first as opposed to merely providing suitable advice.
The initial proposal drew darts from numerous insurance and securities industry lobbying groups, including the National Association of Insurance Financial Advisers and the Financial Services Institute who feared their salespeople would have to limit the products they could suggest for retirement plans.
Various groups argued that retirement plan participants would see investment costs rise under the standard. They also said the Labor Department proposal would likely conflict with a separate fiduciary rule that the Securities and Exchange Commission is planning to govern brokers who give investment advice to individual clients.
The pension plan proposal also would have forced big brokerage firms such as Bank of America's Merrill Lynch & Co. and Wells Fargo & Co.'s Wells Fargo Advisors to decide whether to limit their brokers from working with corporate retirement plans.
The Labor Department rule would not only limit brokers' ability to recommend their companies' own products to employers but prohibit them from collecting commissions from investment companies when employees purchase their funds or other retirement plan products without providing extensive disclosure.
"We have said all along that we will take the time to get this right," Phyllis Borzi, assistant secretary of the Labor Department's Employee Benefits Security Administration and chief architect of the proposed rule, said in a statement.
"Investment advisers shouldn't be able to steer retirees, workers, small businesses and others into investments that benefit the advisers at the expense of their clients," she says.
The political winds began blowing against the proposal when the broker-dealers began arguing that it would restrict their ability to sell Individual Retirement Accounts to investors.
Representative Barney Frank, the top Democrat on the House Financial Services Committee and co-sponsor of the Dodd-Frank financial reform law, last Thursday urged Secretary of Labor Hilda Solis to re-propose the rule in concert with fiduciary changes being studied by the SEC and the Commodity Futures Trading Commission.
"The rule, as proposed, would have serious negative consequences for Main Street Americans in need of retirement advice," says Dale Brown, president and CEO of the Financial Services Institute in a prepared statement. "This is a major victory for FSI, the many industry partners we have worked with, and millions of hard-working Americans who need affordable, unbiased financial advice."
The FSI represents independent broker/dealers, many of which are affiliated with, or had their origin, in the insurance industry.
(Reporting by Suzanne Barlyn and Jessica Toonkel in New York; Editing by Jed Horowitz and Walden Siew)
© 2010 Thomson Reuters.
