A Labor Department official said Thursday the agency's proposal to raise investment-advice standards for brokers working with retirement accounts would be modified in response to criticism.
'We aren't wedded to any particular choice of words or regulatory texts,” Timothy D. Hauser, a DOL deputy assistant secretary, told a meeting of the Securities and Exchange Commission's Investor Advisory Committee. “The point is to improve this marketplace, not to defend the details of our package. There will be changes – no doubt about it.”
The rule would require brokers to act in the best interests of their clients in 401(k) and individual retirement accounts, a standard that investment advisers already meet. Under current rules, brokers are held to a less-strict suitability standard for product sales.
The proposal was
introduced in April with backing from the White House. Public comments are
due by Tuesday.
One provision of the DOL rule that has drawn criticism from the financial industry is the so-called best interest contract exemption. 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.
Opponents of the rule say that the contract must go into effect before a broker begins talking to potential clients.
The DOL is seeking an “upfront, enforceable commitment of fiduciary status” but is flexible about rule language on when the dotted line must be signed, according to Mr. Hauser.
“The exact timing of it, the exact way that you do that, we're open to suggestions and would like to make that as easy and as non-problematic as possible from a business standpoint,” he said.
But Jerome F. Lombard Jr., president of the Janney Montgomery Scott private client group, told the SEC audience that the contract's disclosure requirements are “onerous” and that it would “result in endless litigation.”
In fact, Mr. Lombard, who said he supports a best-interests standard, hammered the entire rule for being too expensive and burdensome. For instance, he said it would require the firm to overhaul its adviser-compensation practices.
“Legal costs, reporting costs, compliance costs and surveillance costs would increase dramatically and ultimately be passed on to clients, increasing their costs to save for retirement,” he said.
His firm would have to move its smaller investors to fee-based accounts, where costs are 50% higher, or “terminate many of these account relationships,” Mr. Lombard said.
An official with the Certified Financial Planner Board of Standards Inc. said the group heard many of the same arguments the brokerage industry is making now when it changed its rules to require planners to act as fiduciaries. Since that 2007 modification, the number of CFPs has increased by 30% to about 72,000.
“Based on our experience, the sky did not fall,” said Marilyn Mohrman-Gillis, CFP Board managing director of public policy and communications. “This reform is long overdue. We believe that it is our job to help the DOL get to a rule that … can work across business models.”
The rule is “scary” for the brokerage industry to contemplate because it will force firms to rethink their product-sales incentives, said Barbara Roper, director of investor protection at the Consumer Federation of America and a member of the SEC committee.
“It doesn't just give lip service to best interest,” Ms. Roper said.
Despite Mr. Lombard's reservations, he likes the DOL tone.
“They said a lot of encouraging things,” he said in an interview following his SEC appearance.
