SBA Advocacy Office: Fiduciary Proposal Cost Estimate Flawed

By Nevin Adams • July 28, 2015 • 0 Comments
Among the more than 800 comment letters filed on the Labor Department’s fiduciary proposal is one from a fellow federal agency that claims the proposal fails to adequately estimate its cost or the number of firms affected by it.

The filing by the Small Business Administration’s Office of Advocacy claims that the Initial Regulatory Flexibility Analysis (IRFA) “lacks essential information required under the Regulatory Flexibility Act (RFA) — and therefore recommends that the Labor Department republish for public comment a Supplemental IRFA before proceeding. The Office of Advocacy is an independent office within the SBA, and its views do not necessarily reflect those of the SBA, which filed its own separate comment letter on the proposal.

Public Not Adequately Informed

In its comment letter, the Office of Advocacy says it is concerned that since the IRFA is deficient, the public has not been adequately informed about the potential impact, and that the Employee Benefit Security Administration (EBSA) has “not effectively weighed less burdensome significant alternatives to the proposed rule.”

Nor is this just another comment letter. Not only is it from another agency within the Obama administration, but for all rules that are expected to have a significant economic impact on a substantial number of small entities, federal agencies are required by the RFA to assess the impact of the proposed rule on small businesses and to consider less burdensome alternatives.

The comment letter expresses concern that EBSA does not clearly state what constitutes a small business in its analysis, and that its methodology for eliminating non-ERISA/RIA firms from the affected firms count suffers from a “lack of transparency and clarity.”

Missing Information

Furthermore, it notes that while EBSA based its cost estimates for the proposal on information provided by the Securities Industry and Financial Markets Association (SIFMA) and the Investment Adviser Association (IAA), there is “little to no information” about these surveys, including the demographic makeup of the surveys’ samples, response rates, sampling procedures and surveying procedures (“to name a few,” notes the comment). The potential misapplication of this data is “particularly problematic” in the use of the “IAA ratio” to determine the number of small businesses potentially affected by the rule, according to the comment letter, “because it is not clear whether the IAA’s data is representative of all small firms” — a determination that it says would be “necessary to allow for such a broad extrapolation.”

And while the comment letter notes that EBSA acknowledges the shortcomings in some of its data sources, estimates and methodologies, it says that “EBSA does not actually do anything in its analysis that would take this uncertainty into account.”

Consequently, the Office of Advocacy calls on EBSA to republish a supplemental IRFA for additional public comment before proceeding with the rulemaking, with “a more accurate estimate of the small entities affected by the proposal.”

It also recommended, based on feedback received from small business owners and representatives, that the supplemental IRFA take into account suggestions to expand the scope of the best interest contract exemption and the seller’s carve-out.

The Office of Advocacy performs outreach through roundtables, conference calls and other means, to develop its position on important issues. The office notes that it held roundtables with small entities on Aug. 31, 2011 and June 15, 2015 on this issue, and that it has spoken with other small business stakeholders about the rulemaking.