I want to offer four reasons why the Department of Labor should rescind a class exemption that would allow conflicted advisers to offer advice to retirement plans under certain circumstances.
Before outlining my arguments, let me provide some background.
On Jan. 21, the Labor Department published final rules regarding the provision of investment advice to retirement plan participants and beneficiaries under the Pension Protection Act and under a new class exemption from prohibited-transaction provisions of the Em¬ployee Retirement Income Security Act. On the same day, President Obama ordered federal agencies to put on hold the publication of any rules until the White House could review them.
Consequently, on Feb. 4, the Labor Department proposed delaying the effective date for the investment advice rules from March 23 to May 22 and briefly reopened the opportunity for interested parties to comment on the rules. The comment period is short — ending March 6 — but the administration appears ready to take comments to heart.
Because the class exemption portion of the new investment advice rules raises substantial policy questions, I will be submitting the four points outlined below to the Labor Department and urge other members of the fiduciary community to comment as well.
First, we are in the midst of an unprecedented financial crisis that was induced in large part by mismanagement and misconduct in the financial services sector. While conflicts of interest have been at the heart of many financial scandals, retirement accounts have been better-protected thanks to the prohibition against conflicts of interest that is part of ERISA.
The new rules would shift em¬phasis from avoiding conflicts to managing and disclosing them. The class exemption is bad policy introduced at the worst possible time.
It contributes to a perception that regulators favor the interests of financial services companies over those of investors.
Second, the class exemption assumes that brokers, who have heretofore operated under a suitability standard of care, will abruptly adapt to detailed procedures designed to nudge them toward fiduciarylike (or fiduciary-lite) conduct. To believe that fiduciary principles will be absorbed through osmosis if non-fiduciaries are immersed in quasi-fiduciary rules is hopelessly naive.
A number of forward-thinking brokerage firms are working to align their business model to a fiduciary standard of care and train their advice-oriented representatives to apply fiduciary practices properly, but this is the exception, not the rule.
Third, the procedures required under the new rules are a Rube Goldberg-like construction: perhaps effective but hopelessly inefficient. They are designed to allow conflicted advisers to access the retirement market by layering on new disclosures, record-keeping obligations and an annual-audit requirement.
The investor protection procedures required to deal with the advisers’ conflicts carry high compliance costs for the service provider or, more likely, for the client when the costs are passed through. Moreover, the highly prescriptive rules-based approach of the exemption would be prone to technical infractions, and the path for litigation would be quite clear when specific requirements were violated.
Service providers who implement level-compensation arrangements and adopt a principles-driven business model firmly grounded in fiduciary responsibility will be favored in the marketplace because investors are better-served in a conflict-free environment. The sample fiduciary-adviser disclosure form provided as an appendix to the rules amply demonstrates how unappealing conflicted advice is when transparency is required.
Finally, there is no coherent regulatory structure in place to monitor or enforce the new rules. When the Labor Department proposed these rules, it acknowledged that oversight responsibilities would be scattered across multiple regulators: the Securities and Exchange Commission for advisers, the
Financial Industry Regulatory Authority Inc. of New York and Washington for brokers, the
Internal Revenue Service for individual retirement ac¬counts and the Labor Department for retirement plans.
Given the heat taken by federal regulators over lax oversight re¬cently, it is difficult to understand how a prohibited-transaction ex¬emption could be codified without clear and coordinated regulatory roles and responsibilities.
Regulators should be adopting policies to promote full acceptance of fiduciary principles, not promulgating rules that dance around them.
Blaine Aikin is president and chief executive of Fiduciary360 LP in Sewickley, Pa.
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