Rep. Wagner drafts bill to kill DOL fiduciary rule, replace it with best-interest standard

Legislation would require brokers to 'avoid, disclose or otherwise reasonably manage' conflicts of interest

Jul 11, 2017 @ 1:32 pm

By Mark Schoeff Jr.

Rep. Ann Wagner
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Rep. Ann Wagner

Legislation written by Rep. Ann Wagner, R-Mo., would eliminate the Labor Department's fiduciary rule and replace it with a best-interest standard for brokers giving retail investment advice.

In Ms. Wagner's bill, brokers would have to provide recommendations that "reflect reasonable diligence, care, skill and prudence," according to the legislative text. They also would have to disclose at the point of sale the compensation they receive and "any material conflict of interest."

The bill goes on to require that a broker "avoid, disclose or otherwise reasonably manage any material conflict of interest with a retail customer."

The legislation would allow brokers to charge commissions and take third-party payments, engage in principal transactions, sell proprietary products and offer a limited menu of products. It would not require a broker to "recommend the least expensive security or investment strategy."

The bill would provide an exemption for the sale of annuities, as long as those sales are governed by an advice standard that is "substantially similar" to the one contained in the bill.

A discussion draft of the measure is on the agenda for a House Financial Services subcommittee hearing Thursday on the DOL fiduciary rule. That regulation, which would require financial advisers to act in the best interests of their clients in retirement accounts, has been partially implemented. But the bulk of the measure is undergoing a reassessment mandated by President Donald J. Trump that could result in revisions.

"The objective of this hearing is to gather evidence as to the unintended consequences of the DOL fiduciary rule, and the need for the [Securities and Exchange Commission] to act as the lead agency on this best-interest standard issue moving forward," a committee memo states.

Ms. Wagner's bill appeals to industry opponents of the DOL rule, who assert it is too complex and costly and will force brokers to abandon clients with modest retirement accounts.

The Financial Services Institute, which represents independent brokers and financial advisers, "fully supports this legislation," FSI spokesman Chris Paulitz wrote in an email. One of the hearing witnesses, David Knoch, president of 1st Global, is chairman of FSI's political action committee.

But a proponent of the DOL rule asserts that Ms. Wagner's bill would establish a broker best-interest standard "in name only."

"It's an unnecessary, ill-conceived, poorly written bill that will weaken protections for retirement savers without doing anything to provide meaningful protections for non-retirement accounts," said Barbara Roper, director of investor protection at the Consumer Federation of America. The group wrote a letter to members of the subcommittee opposing Ms. Wagner's bill.

Backers of the DOL rule say it helps protect workers and retirees from high-fee products that erode savings. They stress that the DOL regulation mitigates conflicts.

Ms. Wagner's bill, on the other hand, is permissive when it comes to conflicts, according to Ms. Roper, because it would allow brokers to avoid, manage or disclose conflicts.

"That's the Wild West in terms of what would be permitted," she said.

A spokeswoman for Ms. Wagner was not immediately available for comment.

Brokers currently must provide advice that is "suitable" for clients based on their objectives, risk tolerance and other factors, but they have latitude to recommend costly products. Investment advisers must adhere to a fiduciary standard.

It's not clear whether Ms. Wagner's bill has any Democratic support. Democrats have been mostly united in opposing attempts to kill the DOL rule, which was finalized during the Obama administration. In the Senate, at least eight Democrats would have to support a measure to kill the rule in order for it to overcome a filibuster.

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