As DOL fiduciary heats up, both sides dig in

The battle over a Labor Department proposal to raise investment advice standards for retirement accounts reached a new level of nasty last week, as supporters and opponents dug in for months of fighting ahead.

Over the course of a few days, the author of a bill that would stop the rule lashed out at Democrats for backing away from her measure, a prominent senator forced a critic of the bill out of a Washington think tank and a DOL official promised to charge ahead while acknowledging there will be changes to the proposal. In the midst of that activity, a pro-investor organization released best practices for financial advisers to put clients’ interests ahead of their own — with Vanguard’s John Bogle as their champion.

In a House Financial Services Committee vote last Wednesday on a bill by Rep. Ann Wagner, R-Mo., that would force the DOL to halt its fiduciary rule until the Securities and Exchange Commission acted — essentially killing the measure — the Republicans and Democrats took opposing sides and the mud started slinging.

“To the pen pals and the panderers who supported this legislation in the past but are now siding with President Obama and [Sen.] Elizabeth Warren, shame on you!” Ms. Wagner said in a statement after the vote. “Putting politics ahead of the best interests of millions of Americans is wrong and, frankly, it’s offensive to tell the American people you don’t trust them with their hard-earned savings.”

The ranking Democrat on the committee, Rep. Maxine Waters, D-Calif., said the DOL rule would prevent conflicted investment advice that would cause low-income people “to lose their meager savings.”

She added: “Whose side are you on? If you’re going to err, you should err on the side of the least of these.”

The bill was approved on an almost straight party line vote in the committee, 34-25, and will now move to the House floor.

Many Democrats have expressed misgivings about the rule, but they appear confident the DOL will modify it to answer the criticisms.

Rep. Gwen Moore, D-Wis., authored a letter to Mr. Perez in September that was signed by 95 other Democrats voicing their concerns over the rule. But she opposed Ms. Wagner’s bill because she wants to tweak the rule rather than scuttle it.

“The comment period has been extensive,” Ms. Moore said at the committee hearing. “What is the point of stopping the rule making in its tracks?”

One target of Ms. Wagner’s ire, Ms. Warren, also flexed her rhetorical and political muscles last week in defense of the DOL rule. In letters to the Brookings Institution and the DOL, she called into question a study by Robert Litan that is critical of the proposal.

Ms. Warren highlighted the fact that Mr. Litan’s analysis, which he conducted with Hal Singer, a principal at Economists Inc., was funded by Capital Group, a financial services firm. Ms. Warren asserted that the financial backing from Wall Street undermined the integrity and conclusions of the report.

RESEARCHER RESIGNS

The same day Ms. Warren’s letter was released, last Tuesday, Mr. Litan resigned from his position at Brookings. The development led opponents of the DOL fiduciary rule to accuse Ms. Warren of strong-arm tactics.

While the political fireworks were going off, a DOL official, citing thousands of comment letters on the proposal, said a fiduciary rule is coming — but it will be changed before it is finalized.

“You’re likely to see that feedback’s going to be reflected in the final rule,” Timothy Hauser, deputy assistant secretary of labor, said at a meeting of the Investment Management Consultants Association in Washington. “We’re taking every bit of it seriously.”

At the heart of the rule is a legally binding contract that allows brokers flexibility in how they charge for their services as long as they commit to acting in clients’ best interests. The operational details of the contract have become a major source of concern for the industry and are the topic of much of the input to the DOL, Mr. Hauser said.

The agency will consider simplifying the mechanics and timing of the contract, he said. It also will review expanding the types of assets that would be allowed in retirement accounts, changing how the contract applies to existing clients and extending the transition time for firms to comply with the new rule.

“We have a lot of work to do between now and a final rule,” Mr. Hauser said.

Similar words from other DOL officials over the last few months have done nothing to assuage congressional Republicans, who portray the rule as regulatory overreach that is on a fast track for finalization before the end of the Obama administration. They warn it would raise regulatory costs for brokers and force them to curtail advice on retirement accounts to investors with modest assets.

As politicians lobbed bombs last week, a group that supports the DOL rule offered a paper outlining 12 best practices for financial advisers to follow to act in clients’ best interests.

The document, written by the Institute for the Fiduciary Standard, was released Wednesday at an event in New York that featured via teleconference Vanguard Group Inc. founder John Bogle, a longtime champion of the best-interests approach to advice.

Mr Bogle mentioned he’d attended a gathering the previous day for the 75th anniversary of the Investment Company Act, where he’d been asked what advice he would give to anybody entering the business today.

“Put the client first,” he said. “That means a federal standard of fiduciary duty. I believe we’ll ultimately get that … Unfortunately, it’s being nibbled to death by the fund industry and by the lobbyists.”

Until then — a final DOL rule is not expected until next spring — advisers can anticipate continued and ever-intensifying rhetoric from both sides of the fiduciary debate in the coming months.