After collecting 805 comment letters, many of them voluminous and offering myriad suggestions, the Labor Department will now be working under pressure to complete its fiduciary rule before it leaves office in 18 months – a deadline some industry observers believe will be impossible to meet.
DOL secretary Thomas Perez said he is listening to criticism of the department's proposal to raise investment advice standards for brokers working with retirement accounts, but it's unclear how extensively the rule can be modified and still make it to the finish line in time.
“As long as we don't lose sight of our North Star — an enforceable best-interests standard — we are flexible on the question of how to get this work done,” Mr. Perez said. “This is about providing guardrails, not straitjackets.”
Making extensive revisions to the DOL proposal, however, will put pressure on the agency's deadline.
“If they make too many changes to the rule, they have to go back out for comment,” said Peter Chepucavage, general counsel at the Plexus Consulting Group.
He doubts that it can be completed before the Obama administration's term ends.
“I think this is going into the next administration,” Mr. Chepucavage said. “If it's a Republican administration, the proposal is dead.”
Brian Hamburger, president of Market Counsel, agreed that prospects for the rule are dim.
“I don't think they have industry or consumer-group consensus,” he said. “I don't think they have political backing. There's almost no likelihood that this rule will be finalized as written.”
In August, the DOL will hold three days of hearings about the rule. It will then publish a transcript of those sessions and take more comments. A final rule could be released as early as next spring.
In
an appearance before a Senate Health Education Labor and Pensions subcommittee on the comment deadline day, July 21, Mr. Perez said the agency would consider refining aspects of the proposal, including the so-called best-interest contract exemption that gives brokers latitude to charge commissions and a variety of other forms of compensation.
Introduced in April with strong White House backing, the rule has the political momentum to cross the finish line, according to Barbara Roper, director of investor protection at the Consumer Federation of America.
“I think the DOL and the administration are absolutely committed to getting this done,” she said. “What they won't do is buckle to industry pressure on having meaningful restrictions on conflicts.”
While the DOL is willing to tweak the rule, it says the proposal is necessary to prevent financial advisers from putting their clients into high-fee investment products that erode their retirement savings. Opponents say it would significantly increase liability risk and regulatory costs for brokers.
Mr. Perez told the Senate committee that the agency is considering modifying directives on disclosures, data retention and the details on when the best-interest contract must be signed.
Those aspects of the rule, and many others, were criticized in hundreds of pages of industry
comment letters.
The Financial Industry Regulatory Authority Inc., the industry-funded broker-dealer regulator, said the rule
introduces ambiguous new concepts, fails to incorporate existing securities laws and would confuse investors and financial advisers.
The Securities Industry and Financial Markets Association, the major industry interest group, said the rule would
make receiving and giving advice much more expensive and hinder workers' and retirees' ability to save. The group called for DOL to scrap the rule and start over.
Almost every industry group said the proposal is “unworkable.”
Among specific criticisms, the Investment Program Association, which represents nontraded real estate investment trusts and other direct-investment products not traded on securities exchanges, said the list of acceptable assets for retirement accounts contained in the rule is too narrow. The organization would like to see it broadened to include alternative investments, such as nonlisted REITs and nonlisted business development companies.
“These products deliver high-quality distributions and income at time that retirees need it most,” said Kevin Hogan, IPA chief executive.
The Investment Company Institute asserts the rule goes too far in expanding the definition of “fiduciary” by putting that status on call centers and websites.
“The effect will be the drying up of these interactions, which is not good for investors,” said David Blass, ICI general counsel.
Two insurance-related groups, the National Association of Financial and Insurance Advisors and the Insured Retirement Institute said the rule would curb the sales of guaranteed-income products, such as variable annuities.
On the other side of the debate, the Financial Planning Coalition — comprised of the Certified Financial Planner Board of Standards Inc., the Financial Planning Association and the National Association of Personal Financial Advisors — praised the rule for providing “long-overdue consumer protections,” and offered several ways it should be tweaked.
Even after modifying the rule, the DOL is unlikely to satisfy its staunchest critics.
“For most of the opponents, there isn't anything the DOL could do to get to a rule they would support,” Mr. Roper said.
The last resort to stop it may come in the courts. For now, industry groups, such as the U.S. Chamber of Commerce and SIFMA, won't speculate on whether they will file a suit.
