Finra brands DOL fiduciary rule misguided, confusing

A Labor Department proposal designed to reduce conflicts of interest for brokers working with retirement accounts would create overlapping regulations that would baffle advisers and investors, Finra says

Jul 18, 2015 @ 10:56 am

By Mark Schoeff Jr.

A Labor Department proposal designed to reduce conflicts of interest for brokers working with retirement accounts would create overlapping regulations that would baffle financial advisers and investors, Finra said Friday.

The rule would require brokers to act in the best interests of their clients in 401(k) and individual retirement accounts, a standard investment advisers currently meet.

Although the Financial Industry Regulatory Authority Inc. supports the DOL's goal, it said the measure does not incorporate existing securities laws and introduces ambiguous new concepts.

“The proposal would impose a best interest standard on broker-dealers that differs significantly from the fiduciary standard applicable to investment advisers registered under the federal and state securities laws, and it would impose the best interest standard only on retirement accounts,” Marcia Asquith, Finra senior vice president and corporate secretary, wrote in a 21-page July 17 comment letter. “This fractured approach will confuse retirement investors, financial institutions and advisers.”

The Finra letter is the first filed by a major financial-industry organization regarding the DOL rule, which was introduced in April with the strong backing of the White House. Comment letters are due by July 21. The agency will conduct a public hearing in August.

Between investment adviser rules administered by the Securities and Exchange Commission, broker requirements enforced by Finra and the proposed DOL rule, as many as six sets of rules could apply to any investment product, Finra said.

“Imposing disparate standards on different accounts would confuse investors because it would conflict with their own logical assumption that these accounts will be treated seamlessly within their total investment portfolio,” Finra wrote.

The DOL should clarify its best-interest standard, simplify how it treats varying compensation levels for products in a retirement account and use existing securities laws and Finra rules as the basis for the proposal, Finra said.

DOL also should streamline the so-called best-interest contract exemption so that it better restricts conflicts of interest and clarify the penalties for breaching the agreement, Finra said. By signing the legally binding obligation to be in a fiduciary relationship with clients, a broker can collect compensation in a variety of ways, including commissions.

If DOL doesn't modify the rule, liability risks and regulatory costs could shut down commission-based brokerage accounts that comprise 98% of IRAs with less than $25,000, according to Finra.

“If the proposal were adopted as is, many broker-dealers will abandon these small accounts, convert their larger accounts to advisory accounts and charge them a potentially more lucrative asset-based fee," Finra wrote. “They will do so largely because of the [best-interest contract] constraints on differential compensation, the ambiguities in the best-interest standard, the lack of clarity concerning various conditions, the costs of compliance and uncertainty about the consequences of minimal noncompliance,” Finra wrote.

The organization also threw cold water on the investing alternative DOL has been touting for low-cost, fiduciary advice: online investment advisers.

"Robo-advice may provide a valuable alternative for some classes of knowledgeable investors, but for many customers robo-advice is a poor substitute for a financial adviser who understands the customer's needs and guides the customer through market turbulence or life events,” Finra wrote.

By the time other major industry organizations and firms have weighed in, the DOL will have hundreds of pages of comments to read.

At an SEC meeting on July 16, DOL officials said the agency wants to reduce broker conflicts that encourage them to put workers and retirees in high-priced products that erode nest eggs. But they're open to modifying the proposal.

“There will be changes, no doubt about it,” said Timothy D. Hauser, a DOL deputy assistant secretary.


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