Industry stiffs DOL on request for IRA data in fiduciary analysis

Mar 4, 2012 @ 12:01 am

By Mark Schoeff Jr.

The financial industry is butting heads with the Labor Department over providing data for a cost-benefit study related to IRAs.

Industry groups had pressured the agency to justify new rules by conducting the study but now are reluctant or unable to produce the data, which would be used to assess the potential impact of a pending rule expanding the definition of “fiduciary” for retirement plan investment advice.

Despite being met with stubborn resistance, the Labor Department said that it will complete the cost-benefit study and propose a new fiduciary rule this year.

Originally proposed in October 2010, the rule was withdrawn in September amid fierce criticism from the financial industry and members of Congress from both parties.

Critics said that it would impose the fiduciary duty mandated by federal retirement law on IRAs for the first time, substantially raising broker costs and driving them out of the market.


The Labor Department argues that reforms are required to protect investors from conflicted advice as they build their own nest eggs through 401(k) plans and IRAs.

Whether those changes are finalized may depend on the cost-benefit analysis. Courts have vacated regulations — most recently a Securities and Exchange Commission proxy- access rule — because of flawed regulatory-impact calculations.

The SEC is poised to conduct its own cost-benefit analysis of a rule that would impose a universal fiduciary duty for retail investment advice.

The Feb. 24 deadline passed on the Labor Department's request for IRA data without action by financial industry groups to provide the material.

“I'm disappointed that we haven't been able to get much data from them,” said Assistant Labor Secretary Phyllis Borzi, head of the Employee Benefits Security Administration.

In dozens of meetings over the past year, industry representatives suggested using personal-account level information, she said.

“I'm puzzled that so little of it appears to be available — even from the folks who told us that is the kind of data we needed,” Ms. Borzi said.

The DOL request was too detailed and allowed too little time to respond, according to industry groups.

The department sent a letter to several organizations Dec. 15 asking for a response by Jan. 15. The deadline eventually was moved back to Feb. 24.

The department is seeking rates of return, capital gains and dividends for individual accounts, as well as financial adviser compensation and investor demographics over a 10-year period. It wants to determine whether investment advice was sought and how it affected returns.

Cobbling that information together can't be done quickly, if at all, according to Dale Brown, president and chief executive of the Financial Services Institute Inc., which represents more than 100 independent broker-dealers.

“There is no single source of data in the level of detail they've requested,” he said.


“It would take an incredible amount of time and money to pull it all together,” Mr. Brown said. “It is the department's responsibility, not the industry's, to make the case for why the rule change is needed.”

The Securities Industry and Financial Markets Association told the DOL that its information request was misguided and expensive to fulfill.

“Initial cost estimates from some of our member firms in providing even a portion of the data runs in the hundreds of thousands of dollars,” SIFMA wrote in a letter sent last Thursday. “Not only is this type of cost and resource expenditure substantial, we do not believe it would yield any meaningful data that could be analyzed by the department, or that could offer any practical utility in connection with [the] department's regulatory-impact analysis.”

Supporters and opponents of the fiduciary rule change traded barbs over the need for the rule, and the quality of the studies being used to bolster the case for and against it.

A study conducted last year by Oliver Wyman Inc. was put forth by the industry as evidence that the rule would hurt brokers. It showed that 98% of investors with less than $25,000 in their IRAs were at brokerage firms and that 7.2 million IRA holders wouldn't qualify for an advisory account at the firms surveyed.

The study was submitted to the DOL by Kent Mason, a partner at Davis & Harman LLP. DOL officials said they asked him for the underlying data from the study, but he failed to produce it.

“The industry makes a big deal of demanding high-quality economic data from regulators, but the studies they submit are the worst kind of shams,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

“Their opposition is ideological rather than fact-driven,” she said. “They clearly have no evidence to support their conclusion that the benefits of the proposal are outweighed by their costs.”

Mr. Mason didn't respond to an interview request.

The DOL itself is guilty of attempting to bend data, Mr. Brown said.

“It appears they started with an assumption and now they're trying to scramble to gather data to justify the rule change,” he said.

“What's the problem that needs to be solved? It's not an unreasonable question.”

The Investment Company Institute suggested to the department that the fact that IRA and 401(k) investment patterns are consistent shows that the IRA holders may not suffer from conflicted advice.

Ms. Borzi said that the agency has been gathering evidence from sources beyond the industry.

“We already have enough data to do a fairly robust economic analysis,” she said. “And all of our data will be completely transparent.”

The analysis will be included with the proposal when it is resubmitted, Ms. Borzi said.

“We want to get it right rather than deal with an artificial deadline,” she said. “We would hope to get it out this year.”


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