Industry, investor advocates square off in comment letters about DOL advice rule

Battle lines drawn again as trade associations call on DOL to withdraw proposal, while proponents say measure fills a regulatory gap.

Financial industry opponents and investor-advocate supporters of a Department of Labor investment advice rule squared off in their familiar positions as the public comment deadline on the measure approached Tuesday.

The Securities Industry and Financial Markets Association called on the DOL to withdraw the proposal and hinted at a legal challenge should the agency issue a final rule.

The measure, which DOL dubbed the retirement security rule, would redefine under federal retirement law – the Employee Retirement Income Security Act – who is a fiduciary and would hold most financial advisors and insurance agents to that standard when making investment recommendations to retirement savers.

The agency is again trying to raise the advice bar for retirement accounts. An Obama administration fiduciary rule was vacated in 2018 by the U.S. Fifth Circuit Court of Appeals.

“We urge the Department to abandon its latest attempt to amend its definition of fiduciary regulation defining investment advice fiduciary, as well as the accompanying prohibited transaction exemption (“PTE”) amendment changes,” Lisa Bleier, head of wealth management, retirement and state government relations at SIFMA, wrote in a comment letter Tuesday. “This version will not survive judicial scrutiny.”

The DOL proposal includes an “overly broad new definition of fiduciary” and “intends to turn many ordinary communications between individuals into ERISA fiduciary conversations,” Bleier wrote.

Many of Bleier’s arguments echo those she and other industry critics made during two days of public hearings about the measure last month. One of the assertions that came up frequently during the discussion was that Regulation Best Interest, the broker standard of conduct promulgated by the Securities and Exchange Commission, and a revised annuity suitability standard issued by the National Association of Insurance Commissioners already provide adequate investor protections.

FILLING REGULATORY GAP

The DOL said the proposal is designed to target “junk fees” that arise as a result of conflicts that entice advisors to put their revenue goals ahead of their customers’ and clients’ interest in building a big nest egg. The proposal addresses insurance products, such as fixed indexed annuities, that are not covered by Reg BI.

Knut Rostad, president of the Institute for the Fiduciary Standard, called the DOL proposal “essential to fill the gap in federal regulation in investor protection left by the SEC’s Regulation BI,” in a Tuesday comment letter.

Rostad examined the transcripts from the DOL hearings and concluded that financial industry opponents of the DOL rule “reveal a contempt for fiduciary advice” in their testimony.

“There is no mention from opponents that costly, complex and opaque products … continue to thrive and harm investors,” he wrote. “There is also no mention from opponents that a fiduciary standard benefits retirement investors over the lower standard in Reg BI or the NAIC model rule.”

Public comments were due Tuesday. The deadline, coming right after the Holidays, raised hackles among those who intend to file letters. The DOL declined to extend the deadline after several industry requests and also resisted similar entreaties more recently from lawmakers.

INSURANCE INDUSTRY STRONGLY RESISTS

The insurance industry has strongly resisted the DOL proposal. In comment letters Tuesday, both the American Council of Life Insurers and the Insured Retirement Institute called for the agency to withdraw the measure.

“IRI urges the Department to withdraw the proposal and to discontinue this rulemaking project unless and until there is objective data and evidence of actual harm to retirement savers that cannot be effectively addressed under current rules,” IRI CEO Wayne Chopus and Jason Berkowitz, the group’s chief regulatory and legal officer, wrote in a comment letter Tuesday.

In their comment letter Tuesday, James Szostek, ACLI vice president and deputy for retirement security, and Howard Bard, vice president and principal deputy general counsel, wrote that the DOL proposal contained “several significant fatal flaws.

“It places an unacceptable and impermissible barrier between low- and moderate-income savers and financial professionals, denying them access to savings opportunities and retirement income solutions they want and need,” Szostek and Bard wrote. “It would harm the very retirement savers it purports to help.”

HURTING LOW-INCOME SAVERS?

The Financial Services Institute, which represents independent broker-dealers and financial advisors, said the DOL proposal would impose a costly regulatory burden.

“If adopted, the proposal would unnecessarily layer costs and complexities onto the heavy ‘best interest’ and other regulation to which our members are already subject, in ways of no practical utility to retirement investors, and thus compromise the availability and utilization of needed investment services for retirement investors, particularly those with smaller account balances,” FSI CEO Dale Brown wrote in a comment letter Tuesday.

But Benjamin Edwards, a professor of law at the University of Nevada Las Vegas, warned the DOL to be skeptical of the argument that the proposal would crimp advice for investors with modest assets.

“Many of the advocates opposing this regulation previously argued to courts that commission-compensated product distributors act as mere salespeople and not as reliable advice givers,” Edwards wrote in a Dec. 28 comment letter. “To the extent that these same industry actors now argue to the Department that raising standards will reduce advice, the Department should understand that the term ‘advice’ may be used in this context in the loosest possible sense and as referring simply to one-sided sales pitches. In reality, the proposal will make advice reliable and allow people to trust financial advice.”

QUESTIONING DOL AUTHORITY

In the lawsuit that killed the 2018 DOL fiduciary rule, industry opponents argued that the DOL had exceeded its authority. They’re making a similar case against the current proposal, which would update a 1975 law that critics say too easily allows financial advisors to sidestep fiduciary responsibilities to retirement savers.

Amending the ERISA definition of fiduciary is a “major question” that requires explicit authority from Congress, Christopher Iacovella, CEO of the American Securities Association, wrote in a Dec. 27 comment letter.

“The Department’s proposal presents a major question, but the Department has failed to identify clear statutory authority for its expansion of ERISA fiduciary status,” Iacovella wrote. The ASA represents regional financial services firms.

The DOL proposal would make a one-time recommendation to roll over funds from a company retirement plan to an individual retirement account a fiduciary act. Iacovella argued that ERISA uses the “common law” definition of fiduciary, which limits it to advice given on an ongoing basis. He also asserted that DOL doesn’t have jurisdiction over IRAs.

“The proposal extends fiduciary duties to investment advice for IRAs, but ERISA limits fiduciary duties to investment advice for employer-sponsored retirement plans,” Iacovella wrote.