The Financial Industry Regulatory Authority (FINRA) says that the Labor Department’s fiduciary proposal represents a “fractured approach” that will sow confusion for many in the retirement industry.
In a comment letter regarding the Labor Department proposal, FINRA says that a best interest standard should apply to both retirement and non-retirement accounts, and that the federal securities laws should serve as the foundation of the best interest standard that will apply to broker dealers.
“Imposing disparate standards on different accounts would confuse investors because it would conflict with their own logical assumption that those accounts will be treated seamlessly within their total investment portfolio,” FINRA notes.
Core Structure Call
As for the need for a consistent regulatory standard, FINRA says that using these existing requirements as the core structure of a best interest standard would not only reduce the costs of transitioning to a best interest requirement, but would also provide assurance that the core structure will be enforced by the SEC and FINRA.
“To be successful, the standard must build upon existing principles under the federal securities laws rather than introducing precepts without precedent that will impede good faith efforts” to comply, FINRA said, while also acknowledging that “…imposing a best interest standard requires rulemaking beyond what is presently in place for broker dealers.”
As evidence of the potential confusion, the FINRA letter notes that the Labor Department’s proposal “…establishes principles that employ imprecise terms with little precedent in the federal securities laws or, in many cases, ERISA,” going on to provide — in some detail — the differences in interpretation/application of terms such as recommendation, projections of performance and reasonable compensation.
Best Interest Clarity Call
FINRA does foresee other problems with adoption of the Labor Department’s proposal in its current form. “If the Proposal were adopted as is, many broker dealers will abandon these small accounts, convert their larger accounts to advisory accounts, and charge them a potentially more lucrative asset-based fee. They will do so largely because of the BICE constraints on differential compensation, the ambiguities in the best interest standard, the lack of clarity concerning various conditions, the costs of compliance, and uncertainty about the consequences of minimal non-compliance,” the letter said.
FINRA also asked that the regulation either clarify the boundaries (how often, when and why) of an ongoing duty to monitor a retirement investor’s investments and alert the investor to any recommended change to those investments, and also asked the Labor Department to clarify that the “best interest” standard itself does not impose such an ongoing duty.
In addition to clarity about the scope and meaning of the best interest standard, FINRA also said that the DOL proposal should:
In a comment letter regarding the Labor Department proposal, FINRA says that a best interest standard should apply to both retirement and non-retirement accounts, and that the federal securities laws should serve as the foundation of the best interest standard that will apply to broker dealers.
“Imposing disparate standards on different accounts would confuse investors because it would conflict with their own logical assumption that those accounts will be treated seamlessly within their total investment portfolio,” FINRA notes.
Core Structure Call
As for the need for a consistent regulatory standard, FINRA says that using these existing requirements as the core structure of a best interest standard would not only reduce the costs of transitioning to a best interest requirement, but would also provide assurance that the core structure will be enforced by the SEC and FINRA.
“To be successful, the standard must build upon existing principles under the federal securities laws rather than introducing precepts without precedent that will impede good faith efforts” to comply, FINRA said, while also acknowledging that “…imposing a best interest standard requires rulemaking beyond what is presently in place for broker dealers.”
As evidence of the potential confusion, the FINRA letter notes that the Labor Department’s proposal “…establishes principles that employ imprecise terms with little precedent in the federal securities laws or, in many cases, ERISA,” going on to provide — in some detail — the differences in interpretation/application of terms such as recommendation, projections of performance and reasonable compensation.
Best Interest Clarity Call
FINRA does foresee other problems with adoption of the Labor Department’s proposal in its current form. “If the Proposal were adopted as is, many broker dealers will abandon these small accounts, convert their larger accounts to advisory accounts, and charge them a potentially more lucrative asset-based fee. They will do so largely because of the BICE constraints on differential compensation, the ambiguities in the best interest standard, the lack of clarity concerning various conditions, the costs of compliance, and uncertainty about the consequences of minimal non-compliance,” the letter said.
FINRA also asked that the regulation either clarify the boundaries (how often, when and why) of an ongoing duty to monitor a retirement investor’s investments and alert the investor to any recommended change to those investments, and also asked the Labor Department to clarify that the “best interest” standard itself does not impose such an ongoing duty.
In addition to clarity about the scope and meaning of the best interest standard, FINRA also said that the DOL proposal should:
- Simplify the treatment of differential compensation by offering financial institutions a choice: either adopt stringent procedures that address the conflicts of interest arising from differential compensation, or pay only neutral compensation.
- Be based on existing principles in the federal securities laws and FINRA rules.
- Streamline the BICE and Principal Transaction Exemption (together, the prohibited transaction exemptions” or PTEs) so that “they only impose conditions that restrict conflicts of interest, and eliminate the ambiguous conditions that will not meaningfully address those conflicts.”
- Clarify the effects of non-compliance with the PTEs and the extent that remedies can be defined in the BICE contract.
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