If the Labor Department and the Securities and Exchange Commission don't coordinate their efforts to strengthen investment advice standards, the potential effect of an SEC rule will be hard to gauge, according to a law firm that represents brokerage and mutual fund clients.
In a comment letter to the SEC, Davis & Harman LLP asserts that a pending DOL rule that would expand the scope of professionals falling under the “fiduciary” definition under federal retirement law would have such a wide-ranging impact on individual retirement accounts that it would undermine a cost-benefit analysis the SEC is conducting to determine whether to proceed with its own fiduciary-duty rule for retail investment advice.
“Virtually all responses to the [SEC's cost-benefit] request will be rendered obsolete and incorrect by the DOL fiduciary project,” Kent Mason, a Davis & Harman partner, wrote in an April 11 letter. “The SEC and the DOL should not function separately in regulating the exact same behavior. The SEC and DOL need to act on this fiduciary project together.”
Mr. Mason used the example of a retail customer going to a broker to discuss $30,000 in a non-retirement account and $40,000 in an IRA. Under the original DOL proposal, Mr. Mason wrote, a broker-dealer would be prohibited from providing guidance regarding the IRA. The customer could not apply anything the broker said about the non-retirement account to the IRA.
“Any normal retail customer would be bewildered by this arrangement,” Mr. Mason wrote. “The SEC request asks about retail customer confusion, but does not mention this issue. The SEC request clearly needs to be modified to address this core issue.”
SEC spokesman John Nester declined to comment. Officials from the DOL were not available for comment.
Barbara Roper, director of investor protection at the Consumer Federation of America, questioned Mr. Mason's thesis.
“The basic premise is wrong because there is a huge area that doesn't overlap,” Ms. Roper said. “To suggest that the DOL rule would render the SEC study obsolete is absurd.”
She also said that the DOL and SEC are working together but each agency is a distinct entity with its own mandate — the DOL concentrating on retirement products and the SEC on securities.
“They are coordinating,” Ms. Roper said. “On the other hand, they have jurisdiction over two different laws.”
But Mr. Mason said the combined effect of the two fiduciary-duty rules would put a double-whammy on brokers.
“If the SEC and the DOL proceed independently, there is a great likelihood that the broker-dealer industry may have to be restructured twice in the course of very few years,” Mr. Mason wrote.
On March 1, the SEC released a
request for information for its cost-benefit analysis. It is considering a potential rule that would impose a uniform fiduciary duty on retail investment advice, requiring brokers to adhere to the same standard of care — acting always in the best interests of clients — that investment advisers already meet.
Comments are due by July 5.
The DOL's fiduciary duty rule is slated to be re-proposed over the summer. It was originally released in 2010 but withdrawn amid fierce financial industry criticism.
The agency said advice standards for retirement products have to be increased to better protect investors who are building their own nest eggs. Critics argue the rule would impose fiduciary liability on IRAs for the first time and drive brokers out of the market.
