Consumer Federation of America claims brokerage firms may be violating DOL fiduciary rule

The CFA is calling on regulators to investigate whether brokers are moving clients to higher-cost, fee-based accounts, which it says would be a violation of the DOL rule

Oct 5, 2017 @ 2:30 pm

By Jeff Benjamin

This story has been updated to reflect clarifications from the Consumer Federation of America and other information, as well as a statement from Fidelity Investments.

The Consumer Federation of America is calling on multiple regulatory bodies to "investigate potential rule violations related to broker-dealer firms' improper implementation" of the Department of Labor's fiduciary rule.

In letters sent this week to Labor Secretary Alexander Acosta, Securities and Exchange Commission Chairman Jay Clayton, and Finra CEO Robert Cook, the CFA challenges as improper the brokerage industry's recent practice of "shifting retirement savings into fee accounts when they would be better off in commission accounts."

In each of the three letters, which are similar but not identical, the CFA quotes a recent SEC comment letter from Fidelity Investments that claims the DOL rule is forcing investors to "pay an asset-based fee to receive exactly the same services that were previously provided to them for no additional fee under a transaction-based fee structure."

"If a firm has commission-based and fee-based available, the rule requires it to recommend what is best for the customer," said Barbara Roper, CFA's director of investor protection.

"We don't know if (investors are being moved to more expensive accounts), but we keep hearing that it is happening, and if it's happening the regulators have all the authority they need to make it stop," she added. "That is not a problem with the DOL rule, because it violates the rule."

In a statement, ​ the CFA asserts that "industry lobbyists have repeatedly claimed that brokerage firms are responding to the rule by shifting retirement savers into fee accounts when they would be better off in commission accounts, exposing them to increased costs in the process."

"It's possible that industry lobbyists are simply engaging in their all-too-familiar misrepresentations of the rule's impact, and it is important to note that those making this claim have failed to provide concrete evidence to back it up," Mrs. Roper said in the statement.

Ms. Roper added that, "contrary to earlier assertions, the vast majority of firms have chosen to continue offering commission accounts under the rule."

"But if they are right that firms are nonetheless steering retirement investing toward fee accounts when they would be better off in commission accounts, these industry groups are essentially acknowledging that brokerage firms are engaged in widespread and egregious violations of both the DOL rule and securities laws," she continued.

In a statement, Fidelity's deputy general counself Ralph Derbyshire wrote:

"The CFA's letters misconstrue language from Fidelity's August 11 comment letter to the SEC. The statement in Fidelity's letter that investors are being "forced" into fee-based accounts was intended as an industry-wide observation that many advisers were no longer offering advice in commission-based accounts. This leaves investors no choice, thus forcing them to move to a fee-based relationship.

"However, it is well understood in the industry that where a provider offers both fee- and commission-based services to customers, it must comply with the requirements of the DOL rule when recommending one type of account over another. Fidelity offers both types of accounts and is in full compliance with the DOL rule when making such recommendations."

Kevin Carroll, managing director and associate general counsel at the Securities Industry and Financial Markets Association, said in a statement that any suggestion that its members were not working hard to comply with the DOL rule was "baseless and inappropriate."

"It was harsh criticism of brokerage accounts, from the CFA and others, that gave us the DOL rule in the first place," he added. " They can't have it both ways."

A spokesperson for the SEC declined to comment. Representatives from Finra and the DOL did not respond to a request for comment.

Dean Harman, principal at the $400 million advisory firm Harman Wealth, described the CFA statements as "pretty inflammatory," in the way the CFA is "calling out the brokerage industry for first claiming that commissions are better for clients, but then also moving clients to fee-based accounts."

"It's kind of a gotcha move," Mr. Harman added.

The other side of the argument, according to Mr. Harman, is that as the DOL rule evolves and is delayed, the brokerage industry is trying to prepare for whatever the rule might eventually look like.

"One of the challenges with the rule, which is shifting the whole investment management industry, is it is forcing people to move to fee accounts, if nothing else, because of the potential liability," he said. "To shift these accounts and be compliant takes time; you don't just flip a switch and move people. It can take 12 to 18 months."

Ms. Roper said she had not yet received a response from the three agencies beyond an acknowledgement of receipt of the letters.

"It's a serious allegation, because it would be a perverse outcome if a rule designed to protect investors is being exploited by brokers to maximize fee income," she added. "We understand that this is a tricky area for Finra to get involved in, but if they hear it from us as an investor advocate it sort of protects them from any cynical perspectives that they are just doing this because they are losing jurisdiction."

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