DOL fiduciary proposal feels heat as more industry players pile on

The leader of a prominent retirement-plan company and a top business trade group both warned Tuesday that a proposed U.S. Department of Labor rule to change investment-advice standards for retirement accounts would hurt small investors and small companies.

Robert Reynolds, president and chief executive of Great-West Financial and Putnam Investments, said the DOL rule, which is designed to reduce conflicts of interest for brokers, would create “red tape and restrictions” that would significantly increase the liability risk and costs for brokers and discourage workplace retirement plans at small employers.

The rule would “stymie offering advice to low-balance retirement savers, hitting those who need advice the most the hardest … [and] open a new advice gap that would actually worsen inequality in this country,” Mr. Reynolds said at the Spark Institute national conference in Washington.

Mr. Reynolds said he supports the DOL’s effort to protect investors from brokers who put them in high-fee products that are better for the brokers’ income than for the investors’ nest eggs. But that goal can be accomplished without a new rule, Mr. Reynolds said, calling for “strict enforcement” of measures on the books and full disclosure of fees, compensation and conflicts of interest “in plain English.”

“It’s time to really get tough about serving the saver’s best interest,” Mr. Reynolds said. “Let’s build on existing law to drive bad actors out of our business.”

Separately, the U.S. Chamber of Commerce released a report Tuesday that asserted the DOL rule would “impose significant new compliance costs and legal liabilities on advisers” to small businesses offering Simple IRAs to employees in lieu of traditional 401(k) plans.

The DOL proposal’s mechanism for giving brokers flexibility in compensation arrangements — allowing them to charge commissions and collect revenue-sharing payments as long as they sign a legally binding contract that requires them to act in their client’s best interest — doesn’t help advisers to small business plans, according to the Chamber.

The so-called best interest contract exemption applies to individual IRA owners, but it is not clear whether the exemption is available for Simple IRAs while they are being offered by employers, according to the report. “Further, even if it does apply, the new exemption would itself substantially increase costs for advisers due to its many conditions and requirements,” the report states.

Tuesday’s pushback on the rule follows similar criticism last week from the Securities Industry and Financial Markets Association and in May from Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator.

But the mounting resistance from the financial industry is opposing a potentially much stronger force: President Barack Obama, who backs the DOL rule and calls it a centerpiece of his “middle-class economics” initiative.

Kathleen McBride, chair of the Committee for the Fiduciary Standard and a proponent of the DOL rule, expressed confidence that the White House will get the rule finalized before Mr. Obama’s term ends in early 2017.

“I think [the rule] is going to go forward,” said Ms. McBride, founder of FiduciaryPath, a fiduciary-duty consulting firm. “This is too important to the economy.”

The industry is engaged in “an act of desperation” to protect the status quo that has allowed it to “take trillions of dollars from retirement investors over the decades,” Ms. McBride said.

The administration made a similar argument in a report earlier this year that claimed retirement investors lose $17 billion annually due to broker conflicts of interest.

Mr. Reynolds criticized the DOL rule’s “underlying assumption” that brokers are not treating their clients well.

“That’s just a flat wrong assumption,” Mr. Reynolds said. “The client’s best interest is our best interest without a doubt.”

A financial watchdog group disputed Mr. Reynolds’ assertions about the industry always doing what’s best for its customers.

Better Markets scoured Putnam’s Securities and Exchange Commission registration and found a line in which Putnam warned that conflicts could arise involving its use of affiliates’ products and services.

“Unless Putnam’s CEO states that Putnam has never used, uses or will ever use ‘affiliated products and services when those products and services are not in our clients’ best interests’ and amends the SEC ADV filing, then he should retract his statement that Putnam’s ‘client’s best interest is our best interest without a doubt,’” Dennis Kelleher, president and chief executive of Better Markets, said in a statement. “At a minimum, Putnam’s own legal filing with the SEC creates a substantial ‘doubt.’”

A Putnam spokesman said the language in the firm’s ADV is a “broad disclosure” that has been an “industry standard for many years” to satisfy SEC mandates.

“Under Bob Reynolds’ leadership, Putnam has sought to bring a customer-first approach to every facet of its business and to its daily interactions with clients and investors,” Jon Goldstein, Putnam director of public relations, said in a statement. “Putnam and its investment management peers are required by the SEC to explain potential risks and conflicts in Form ADV client documents — even if those conflicts are remote and strong procedures are in place to make sure they don’t materialize.”

Like many industry leaders, Mr. Reynolds wants the SEC to go first in promulgating a fiduciary-duty rule for all retail investment advice.

But the DOL is poised to finalize its rule long before the SEC gets started on a separate one. The comment period for the DOL proposal closes July 20.

The agency “is going to have to make changes to get a rule that works in practice,” said Bradford Campbell, author of the Chamber report. He is a former assistant secretary of labor and head of the Employee Benefits Security Administration at the DOL, now counsel at Drinker Biddle & Reath.

The DOL did not immediately respond to a request for comment.

Related Topics: Financial Industry Regulatory Authority, Securities and Exchange Commission, Securities Industry And Financial Markets Association (SIFMA)