Perez vs. Gallagher: Fiduciary Rule Pushmi-Pullyu Continues
The Pushmi-Pullyu, a two-headed animal character from author Hugh Lofting’s Doctor Dolittle series of children’s books, does not actually exist. But the back-and-forth over the Department of Labor’s proposed fiduciary rule is enough to make one wonder if maybe they really do after all.
July 21 provided a poignant example, as Labor Secretary Thomas Perez testified on Capitol Hill on the proposal, while across town Securities and Exchange Commission member Daniel Gallagher sent the DOL a public comment letter criticizing it.
Perez appeared before the Employment and Workplace Safety Subcommittee of the Senate Committee on Health, Education, Labor and Pensions. He lost no time
in positing that the proposal is “a reasonable, middle-ground approach” that will “protect workers from conflicts of interest in retirement investment advice” and is “grounded in a basic principle — that investment advisers should act in their clients’ best interest, not their own.”
Perez reiterated what he has said many times before: that he considers the rule to be a way to protect consumers and plan participants. “Retirement security is a fundamental pillar of the middle class. We must ensure that Americans who work hard and save responsibly for retirement are getting a fair share of the returns on those savings. This subcommittee knows too well that there is a retirement crisis in America and that not enough Americans are saving for retirement. I’m deeply concerned that even if you’ve done the right thing, worked hard, and saved what you could, you could end up in a situation where you do not have what you need for retirement simply because your adviser isn’t required to put your interests first.”
That stance is part of what evoked Gallagher’s ire. He didn’t mince words: in his letter, Gallagher called on the DOL to scrap the plan
, describing it as “rampant nanny-statism.”
Perez took advantage of the opportunity to once again expound on his contention that the government needs to ensure advisors act in their clients’ best interest. “There are many advisers who work every day to do right by their clients” he said, continuing, “but others operate under no such commitment, and there’s nothing stopping them from getting backdoor payments at their client’s expense. The corrosive power of fine print and buried fees can eat away like a chronic illness at a person’s savings.” Perez told lawmakers, “In reality, conflicts of interest and hidden fees too often result in bad advice that is not in our best interests.”
Gallagher disagrees. He said in his letter that the DOL argues that if brokers cannot charge commissions, they might have to charge a fee based on a percentage of assets — and that such a pricing scheme could be too costly for some Americans. Rather, Gallagher said, the proposal would do the opposite of what Perez intends — it could limit the options available to ordinary investors and hurt middle class investors in the process.
Perez told the subcommittee that the rule does not micromanage advisors and that “to allow maximum flexibility,” it “does not include detailed rules as to what advisers can and cannot do to serve their clients.” He said that it is “intended to provide guardrails, but not to be a straightjacket, because we know there is not a one-size-fits-all solution to putting clients’ interests first.” And he pointed out that the proposal contains carve outs and exemptions to allow for flexibility and workability.
The best interest contract is “at the heart of the proposal,” said Perez, which he called “an innovative approach designed to respect existing business models while protecting consumers and leveling the playing field for impartial advisers.”
Perez also hailed the DOL’s effort to be “responsive to the substantial input we received from a wide range of stakeholders,” citing the meetings they have had with members of the financial industry and consumer and civil rights groups. Perez also cited the DOL’s cooperation with the SEC, saying, “We have also worked extensively with colleagues throughout the government, including and especially the Securities and Exchange Commission.”
But Gallagher, himself a member of the SEC, is not impressed. He wrote that the discussions the DOL and SEC held on the rule “have borne no fruit,” and said the proposal does not mention that the SEC already has an extensive regulatory regime for brokers.
To demonstrate that the DOL is responsive and is open to revising the rule, Perez told the senators, “We heard from numerous stakeholders, in both the industry and advocacy communities, that a principles-based rule would work best in this rapidly evolving marketplace. We responded with the best interest contract exemption — a completely new approach that directly addresses these suggestions.”
“So far,” Perez said, “we have heard from some who want us to go further and ban all conflicts of interest and end commissions, while others have said that we don’t need to act at all. Those comments tell me that we have probably found the right middle ground in providing greater consumer protection in a way that respects the important role played by investment advisers in helping the middle class achieve the American dream of a secure retirement. I am most heartened by the comments that offer suggestions on even better ways to achieve that objective.”
By the way, the number of comment letters posted on the DOL’s website
currently stands at 515 — and counting.