SEC commissioner: DOL fiduciary rule would create 'a mess'

Daniel Gallagher Jr. says the agency should stand down and not finalize rulemaking

Aug 4, 2015 @ 1:18 pm

By Mark Schoeff Jr.

Securities and Exchange Commission member Daniel Gallagher Jr. warned Tuesday that a Labor Department proposal to reduce conflicts of interest for brokers working with retirement accounts would create “a mess” in the regulation of investment advice.

Even investment advisers, who adhere to a best-interests standard under securities law, would not necessarily be compliant with the DOL rule when providing financial guidance to clients in 401(k) and individual retirement accounts, according to Mr. Gallagher.

“You won't be charging commissions, but you still won't be handling your conflicts the way DOL wants you to handle conflicts, which is basically prohibiting them,” Mr. Gallagher said in an appearance at the U.S. Chamber of Commerce in Washington. “You're going to have a mess.”

In a comment letter last month to DOL, Mr. Gallagher blasted the rule. In his remarks Tuesday, he echoed financial industry criticism of the proposal, saying investors with modest assets would lose access to advice because of rising regulatory costs for brokers.

The rule would cause “an elimination of an entire class of accounts for a class of investors,” as they would be pushed into relationships with advisers in which they're charged a fee for advice based on their assets or into online accounts.

Mr. Gallagher also attacked the proposal for foisting “unlimited liability” on financial advisers.

“This is a total gift to the plaintiff's bar,” Mr. Gallagher said.

Designed to curb incentives that encourage brokers to put investors into high-priced investment products that erode their retirement savings, the proposal was introduced in April with White House backing.

The initial comment period ended July 21. Next week, the DOL will hold four days of hearings about the rule. It will then publish a transcript of those sessions and take more comments. A final rule could be released as early as next spring.

Labor Secretary Thomas Perez has assured lawmakers and opponents the agency is listening to criticism and will modify the rule.

But Mr. Gallagher doubts there's enough time to make major changes.

“They should just stand down and not do a final rulemaking,” Mr. Gallagher said.

Under the rule, brokers would have to act in their clients' best interests, or as fiduciaries, a higher bar than the current suitability standard that applies to them. Investment advisers already are fiduciaries under securities laws.

The financial industry has asserted that the SEC should first propose a uniform investment-advice standard before the DOL finalizes a rule for retirement accounts.

Proponents of the DOL rule say that forcing the agency to wait on the SEC would kill the DOL rule because the SEC is not close to making its own proposal, despite mulling one for years under authority provided by the Dodd-Frank financial reform law.

Although Mr. Perez has said DOL has consulted with the SEC, Mr. Gallagher doubts the agency is motivated to cooperate with the SEC because it failed to refer to the SEC in its proposal.

“There's no mention,” Mr. Gallagher said. “It's a stand-alone regime.”

The speech may be the last major public address Mr. Gallagher makes as an SEC member. He has indicated he will step down from the five-member commission as soon as a successor is named. The White House has not yet nominated a replacement for Mr. Gallagher, a Republican, or for Luis Aguilar, a Democrat, who also is leaving the agency.

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