A Dispassionate Report on the Fiduciary Rule

By John Iekel • July 10, 2017 • 0 Comments
The last word one would associate with the Department of Labor’s (DOL) fiduciary rule is “dispassionate.” But that accurately describes a new report by the Congressional Research Service (CRS) concerning the rule.

The Congressional Research Service, known as Congress' think tank, is a public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works primarily and directly for members of Congress, their committees and staff on a confidential, nonpartisan basis. And, in “Department of Labor’s 2016 Fiduciary Rule: Background and Issues,” John J. Topoleski, an analyst in income security, and Gary Shorter, specialist in financial economics, discuss the issues that led to the rule, the rationale behind it, the rule itself and reactions to it.

“The Obama administration put forward several reasons explaining the need to update the definition of investment advice,” say Topoleski and Shorter, which they note “included changes in how Americans prepare for retirement, quantitative estimates of the cost of conflicted financial advice, and concerns regarding rollovers from DC plans to IRAs when workers change jobs or retire.” They add that “some stakeholders questioned the validity of the evidence used to justify the rule.”

In their discussion of what led to the preparation and adoption of the rule, Topoleski and Shorter note that “the DOL argued that the definition of investment advice needed to be updated because of significant changes that have taken place in how American prepare for retirement since the mid 1970s. Not only that, they note, DC plan participants have more decisions to make than DB plan participants do. They add, “Because financial decisions can be complicated, DC plan sponsors sometimes provide investment advice or investment education to plan participants. In addition, retirement investors may receive outside help with these decisions.”

Topoleski and Shorter note in their discussion that the “DOL first proposed broadening the definition of investment advice in October 2010” and that the proposal “generated much controversy” and was withdrawn almost a year later, and that the revised proposals the DOL issued in 2015 also did.

The final rule issued in 2016, they say in the 28-page report, replaced the five-part test of the rule issued in 1975 with a more inclusive definition. They continue that “In addition to broadening the definition of investment advice, the rule provides carve-outs for situations that are not considered to be investment advice” and that it is accompanied by new prohibited transaction exemptions (PTEs) and amendments to them. “These,” they say, “allow fiduciaries to continue to engage in certain practices that would otherwise be prohibited.”

Topoleski and Shorter also include a discussion of perspectives on the rule from stakeholders, consumer advocacy groups, and the Trump administration. They also address disclosures and compliance, as well as coordination with the Securities and Exchange Commission, and outline the legislative response(s) to the rule.