A Fiduciary Throwdown in D.C.
The Bipartisan Policy Center convened what at least one participant termed a “policy wonk throwdown” in the nation’s capital May 27. The subject? The Department of Labor’s fiduciary proposal
The actual title of the event was “Champions, Critics and Consequences of a New Fiduciary Standard,” and it covered all that ground and more.
Jeffrey Zients, Director of the National Economic Council and President Barack Obama’s economic policy director, opened the session, describing the fiduciary proposal as the “logical next step” in the president’s “consumer protection agenda.” Zients repeated the elements that have been part of the mantra supporting the proposal: the retirement world has undergone significant change over the past 40 years; bad retirement investments with high fees and lower returns;” and the “conflicts of interest” in commission structures are costing retirement savers $17 billion a year.
Zients acknowledged that while the rule was still out for comment, the past five years of feedback and the additional four months for comment now were “more than ample time for input.” He went on to say that “…for some special interests, the only good rule on conflicts of interest would be no rule at all. That’s not going to happen. Inaction is not an acceptable outcome.”
A Level Playing Field
Next up was a lively panel discussion featuring participants on both sides of the issue. Felicia Smith, the Financial Services Roundtable’s VP and Senior Counsel for Regulatory Affairs, challenged the notion that there was a “widespread and pervasive” problem, and detailed the various regulations and oversight already provided to help protect investors.
Sameera Fazili, a former senior policy advisor on the National Economic Council, said that the Labor Department was trying to create “a level playing field” so that investors don’t have to worry that the professional they’ve hired will put their best interest first. She said that individuals are confused by the associated regulatory standards.
Picking up on comments made by Zients that the regulation provided “streamlined, flexible exemptions,” Mark Smith, a partner at Sutherland Asbill & Brennan, noted that the Best Interest Contract Exemption (BIC) takes up “more than 400 columns” in the Federal Register. He noted that the technology expense would be “substantial” and that, layered on top of other disclosures mandated since 2010, six types of disclosures would be required for some firms. He also expressed concerns about investor choice being curtailed and smaller players being squeezed out under the burdens of the proposed compliance regime. As for the Labor Department’s projections of the cost burden, he said that, “all we could say for certain about them at this point is that they would be low.”
Pamela D. Everhart, Senior Vice President of Government Relations at Fidelity Investments, asserted that her firm wants to work with the Labor Department to address issues with the proposal, but described the current version as “unworkable.”
Micah Hauptman, Financial Services Counsel at the Consumer Federation of America, reiterated that the Labor Department had listened to industry concerns, as evidenced by the allowance for commissions, revenue-sharing and 12b-1 fees in the proposal — subject to the BIC, of course. By way of pointing out the industry’s resiliency and the positive trends supported by the proposal, Hauptman noted Vanguard’s recent move to lower the asset threshold for access to its robo-advisor product to $50,000. However, several members of the panel pointed out that the average IRA balance is considerably smaller than that.
Calling for the industry to work with the Labor Department, he nonetheless said that he anticipated litigation from the industry, including from the Securities Industry and Financial Markets Association (SIFMA). But he reiterated that whatever the perceived issues might be, “this is still just a proposal.”
Smith acknowledged that this is a heavily regulated industry. “The question is whether the BIC exemption is workable or a poison pill.”
‘Not if, But How’
SIFMA President and CEO Ken Bentsen said that with regard to a best interest standard, “That question has been asked and answered” in the affirmative. “The debate is not if, but how we should implement such a standard,” he said, but noted that SIFMA’s view was that that standard “should be consistent across the entire retail market.”
Bentsen said that the current proposal goes beyond the 2010 version in several respects, notably the elimination of the seller’s exemption and the narrower definition of education that has been in place since 1996. He said that the BIC “contains so many conditions and restrictions that our members believe it is unworkable as drafted.” He noted that would subject firms to a new legal liability, limit investor choice, “impose level fees at the firm level and thus seek to set market prices” and require “unprecedented” new disclosure and compliance regimes, “some of which may well conflict with other securities laws.”
You can watch a video of the session here.