Subcommittee on Financial Institutions and Consumer
Hearing: Conflicts of Interest Proposal”
10 – Thursday, August 13, 2015
- BIC – Industry representatives stressed that
the BIC exemption is unworkable. DOL’s Hauser stated that more comments on
specific procedures that would allow the BIC exemption to work would be
very helpful because the DOL is not seeking to eliminate the commission-based
model, but rather to prohibit incentives that run contrary to the best
interest standard. In the later panels, Hauser repeatedly asked
panelists if an exemption that required an enforceable, upfront commitment
to act in the client’s best interests (possibly made at the point of sale
if it could apply retroactively) and charge reasonable fees for services
given could, in principle, be workable.
- Mandatory Arbitration –
Several supporters of the overall proposal were critical of mandatory
arbitration, insisting that it does not provide investors enough
- DOL Jurisdiction –
A number of panelists argued that the SEC is better suited to implement a
fiduciary standard, while supporters of the DOL countered that only the
DOL has the power to exercise jurisdiction over all retirement products. Further, DOL speakers noted that
Congress was the body that originally decided to split oversight jurisdiction.
- Conflicted Advice –
The DOL insisted that the rulemaking is intended to “mitigate, not
eliminate” conflicted advice, and that the DOL would like to preserve the
commission-based model and tamp down on conflicts.
- RIA – Many complaints were raised with the
DOL’s Regulatory Impact Analysis, especially regarding its estimates of
the rules costs and benefits, and whether it used sufficient evidence.
- Judy Mares, Deputy Assistant Secretary
- Timothy Hauser, Deputy Assistant Secretary for
- Joseph Piacentini, Director and Chief
Economist, Office of Policy and Research
- Joe Canary, Director, Office of Regulations and
- Lyssa Hall, Director, Office of Exemption
- Christopher Cosby, Division of Regulatory
Policy Analysis, Office of Policy and Research
- Lou Campagna, Division of Fiduciary
Interpretations, Office of Regulations and Interpretations
- Karen Lloyd, Division of Class Exemptions, Office
of Exemption Determinations
- Keith Bergstresser, Economist
For Written Testimonies,
Hearing Related Materials, Requests to Testify, Public Comments and the Hearing
Webcast Archive, please click here.
Certner, Legislative Counsel and Legislative Policy Director, AARP
Van Vleet, Chief Investment Officer, Textron Inc., Committee on Investment
of Employee Benefit Assets
Mohrman-Gillis, CFP Board Managing Director, Public Policy and
Raymond Ferrara, Chairman and CEO, ProVise Management Group LLC
- All of the panelists, as
well as the organizations they represented, were in concurrence that,
though the rule was not perfect, it was long overdue and the regulation
would better protect retiring seniors.
- Ferrara claimed his business, ProVise, has been
meeting a fiduciary standard without any substantial increased costs.
- The panelists also were
in support of the Best Interest Contract (BIC) exemption, even though a
mandatory binding arbitration clause was included, because when advisors act
in their client’s best interest, litigation is less likely.
AARP submitted two comment letters: one in support of the
Department of Labor’s new proposed rule, and one in support of the BIC exemption. Because of the increasing challenges facing
those trying to save for retirement, Certner argued that investors need to know
advice given to them is in their best interest.
Van Vleet was brief with his comments while on the panel, explaining that
his company, “Textron” had been acting under a fiduciary standard and felt as
though it was the correct way to operate due to fairness.
Mohrman-Gillis expressed her support for a strengthened fiduciary
standard, explaining her support for the rule.
Though she supported the DOL’s intentions, she felt as though the
re-proposed rule is not perfect, and offered several suggestions in her comment
letter. She argued that CFPs and firms
are more likely to adjust their policies than to abandon their middle class
Ferrara opened by explaining that, while it is true most financial
advisors often want to act in the best interest of their client, a rule is important
to ensure it happens. He is in support of
the re-proposed rule because he feels as though it will ensure advisors act in
their client’s best interest.
Hauser asked a question to the panelists in regard to the
changing of timing requirements. Mohrman-Gillis
responded, arguing that changing the time requirement is not flexible enough to
work throughout business models; in her organization’s comments, they had
mentioned measures to handle it. For
existing contracts, she suggested updating and allowing the client to
dissent. For new contracts, she
suggested explaining it to clients and matching their business model if
Hauser to Ferarra: In regards to the letter of support for
Mandatory Binding Arbitration, “What gives?” Ferrara responded with, “We feel
as though, if you are acting in the best interest of your client, there is less
likely to be litigation.”
Lloyd asked whether there had been a problem with clients
being uncomfortable when offered a contract. Ferrara responded affirmatively, and suggested
that a way to handle it is to go over the process prior to producing a contract.
O’Brien, Assistant Policy Director for Health and Retirement, AFL-CIO
E. Bentsen, Jr., President and CEO, SIFMA
urged the DOL to move forward with the rulemaking and avoid “loopholes.”
offered to meet with the DOL to go through the NERA and Deloitte studies
in response to Hauser’s questioning of their methodologies and data.
was very critical of the DOL’s reliance on mandatory arbitration and
argued that it does not protect consumers effectively.
In his statement, O’Brien
urged the DOL to “stay true” to a broad statutory definition of fiduciary retirement
advice that avoids “tricks, traps and loopholes.” He said the DOL should use its authority to
grant administrative exemptions cautiously, but conceded that the DOL should be
willing to provide greater clarity about what communications constitute advice.
Keeney also offered strong support for
the proposal, but said its failure to prohibit mandatory arbitration is a
“fundamental flaw” because arbitration fails to protect customers.
Bentsen reiterated SIFMA’s
support for the implementation of a best interest standard, but said the DOL’s
proposal is far too complex and prescriptive. Specifically, he said the BIC exemption and
principal trading exemptions (PTEs) are so complex that firms have concluded
that they cannot be made operational. Additionally,
he was critical of the DOL’s Regulatory Impact Analysis (RIA) for not showing
how the proposal would benefit the public quantitatively and underestimate its
Hauser asked Bentsen to
provide the survey questions, underlying data, and methodologies from the
Deloitte and NERA studies cited in his statement. Bentsen said SIFMA would be willing to meet
with the DOL and walk through the studies.
Hauser, noting SIFMA’s support
for a best interest standard but its concerns with implementation, asked if
SIFMA could support the rulemaking if the DOL addressed all workability issues
with the rule. Bentsen said this is “a lot to assume” and stated that SIFMA
believes the best interest standard should be developed by the SEC.
Canary asked if there is any
need for special rules dealing with the applicability of best interest rules to
funded welfare plans or health savings accounts. O’Brien answered that it is entirely appropriate
to apply the definition of fiduciary investment advice.
Canary asked if any kind of
mandatory alternative to arbitration would be acceptable. Keeney responded that a voluntary, non-binding
process would be better because it gives customers a chance to negotiate.
Canary asked about the
seller’s carve out and what kind of communication would be sufficient for
investors to have fair notice that what appears to be advice is a sales pitch. Bentsen noted FINRA work to establish
procedures for firms to comply with, and added that the DOL is being overly
Roper, Director of Investor Protection, Consumer Federation of America
Lane, IRI Chairman of the Board of Directors, Head of U.S. Life and
Retirement, AXA, Insured Retirement Institute
Blass, General Counsel, Investment Company Institute
made her initial points on the arguments to ignore; she listed three. She
claimed that the financial industry works well mostly only for the firms,
often hurting investors.
opened up by stating the he supported the DOL objectives, however, if the
rule as written is implemented, there will be negative and unintentional
felt as though the proposed rule was complicated, confusing and lacked
flexibility. He opposed it as
written and offered five solutions: 1) DOL must revisit the flawed
justification of the rule in their analysis; 2) develop a more targeted
fiduciary definition; 3) DOL needs to greatly simplify the rules exemptions;
4) DOL should avoid retroactively implementing the rule; and 5) DOL should
abandon the high quality/low cost exemption.
Roper opened the hearing by
remarking about the “tiny good nuggets” comments in the thousands of pages of
comment letters sent to the DOL, and explained that there were some arguments
to specifically ignore. The first was
that the industry supported a best interest standard, just not the current
proposal. The second argument was that the SEC should take over the rulemaking;
claiming the SEC would make a narrow rule that does more damage than good. Lastly, she added what she coined as “the
industries favorite argument,” which claims that it may force financial
advisors to stop offering these services.
Lane began his testimony by
first saying he supported the DOL and their objectives, however he expressed
concerns over possible negative impacts of the new rule. He argued that the current proposed rule is
unworkable, and it could cause financial concerns to small retirement accounts.
He offered some solutions, including
better defining the term “education,” as well as addressing variable annuities.
Blass felt as though it should
be innate for financial advisors to act in the best interest of their clients,
however the rulemaking process is complicated and confusing, lacking
flexibility for business owners. He also
offered five solutions to his concerns with the rule. He felt that the DOL must revisit their flawed
justification for a rule change. Next,
he requested there a more targeted definition of fiduciary. Third, he explained
the DOL needed to greatly simplify the rules exemptions. Fourth, he explained that the DOL should avoid
retroactively implementing the proposed rules. Lastly, he argued that the DOL should abandon
the high quality/low cost exemption.
Hauser asked the panel: “is a
seller’s exemption necessary and how can it be implemented without opening up a
loophole?” Blass responded that there
should be a seller’s exemption, and emphasized that the investor should not be
confused. Blass also emphasized that he
agreed with the definition of “recommendation,” but that there was a lack of
clear definition in the proposed rule.
Hauser again asked Blass a
question, “should a simple disclosure line get you out of fiduciary duty?”
Blass responded by repeating
his emphasis of not confusing the investor, while also maintaining his stance
on relying on the totality of circumstances. If there is an obvious establishment of trust
between a client and a firm, then the fiduciary standard should be held.
Hauser asked Lane, throughout
the initial stages of talking with a financial advisor, and the numerous back
and forth discussions, is there an education component? Lane responded with yes
there is, and that they often discuss the concerns of the client (such as
outliving their income).
Roper became involved in this
conversation, arguing the desire for life-long income is clear, however, the
road to getting there is not. She
further stated that there are some options that are good for the investor,
while others are good for the firm, and the new rule would disallow some that
benefit the firm.
Bullard, Director, Business Law Institute, University of Mississippi
School of Law
Smith, Vice President and Senior Counsel for Regulatory Affairs, Financial
Finke, Director, Retirement Planning and Living, Texas Tech University
supportive of the DOL’s proposal, Finke suggested studying the investment
practices of those without financial advice.
was very critical of the arbitration process, insisting that would not be
effective in an ERISA context or with the BIC.
explained FSR’s SIMPLE PTE proposal as an alternative to the DOL process
that could harmonize with efforts towards a uniform fiduciary standard.
Bullard offered examples of
how commission structures can distort incentives, but then argued that the
DOL’s proposed rule would have “generally no effect” on financial advisors’
incentives other than eliminating banned product types. He added that BIC would not be enforceable in
Finke likened financial
advisors to doctors and argued that the assumption of a fiduciary standard of
care exists in other such cases of “imbalance of information.” He suggested that it would be reasonable to
also study what a worker would have invested in without an advisor because the
result may be worse. He further
advocated that the financial services industry could work to create
standardized retirement income products that can be easily compared by
Smith supported a best
interest standard from “front-line” financial regulators. She called the DOL proposal “extremely
complicated and impractical” while criticizing the DOL’s estimates of its costs
and warning of many unintended adverse effects. To combat bad actors, she
called on regulators to enforce existing laws. She also explained FSR’s SIMPLE PTE proposal
as an alternative to the DOL rulemaking.
Hauser asked Smith a series of
questions about FSR’s SIMPLE PTE proposal and how it would impact the alignment
of advisor incentives with their customers’. Smith explained that the proposal would leave
this to firms’ internal controls, but that regulators would ensure that proper
procedures are in place.
Hauser said most of Bullard’s
presentation of how commissions affect incentives would seem to be address in
the DOL’s proposal, but that Bullard said the proposal would have little
effect. Bullard answered critically
about the DOL’s reliance on arbitration, saying it would not be effective for
ERISA-related claims or the BIC.
Piacentini asked Smith about
monitoring at firms and how they look for instances where compensation
incentives might affect the advice given. Smith explained that firms often use their
compliance departments to create exception reports that lead to internal
conversations about the justification of different actions.
Breyfogle, Groom Law Group Chartered, America’s Health Insurance Plans
& Blue Cross Blue Shield Association
Saxon and Thomas Roberts, Groom Law Group Chartered, Group of Insurance
Rhoades, Program Director / Assistant Professor of Finance, Gordon Ford
College of Business, Western Kentucky University
urged for exclusion of Health and Wellness Plans, as well as Health
Savings Account Platform Providers, from the proposed rule; DOL
representatives responded that the rule is intended only to cover
“investments products,” and not products such as health or life insurance.
and Roberts called for a re-proposal of the rule, stating that the current
language was “unworkable,” and requested consistency with certain existing
attacked the proposed FINRA best interest standard, and asked that the
DOL, while making reasonable accommodations, ensure that industry conforms
to the proposed standard, and that the standard does not change to
accommodate current industry practices.
In his statement, Breyfogle
addressed two possible “unintended consequences” of the proposed rule:
specifically that 1) the rule would cover health and welfare plans; and 2) that
the rule would have negative impacts on HSA platform providers. He warned that any “chilling” effects on
information in the insurance marketplace at this time would be particularly
dangerous given the state of flux in the market.
Saxon and Roberts addressed
concerns from the insurance industry in regards to annuities, and asked that
the DOL provide a carve-out when there would be no reasonable belief that the
advisor was engaging in an unbiased action. Further, they stated that the current proposed
exemptions – which lump together annuities and investment-only products – were
a poor fit for annuities, due to fundamental product differences. Moreover,
Saxon and Roberts claimed that the rule, as proposed, would diminish individual
and small employer access to advice and annuity products.
During his statement,
Rhoades provided background on a number of academic studies related to the
financial markets. The studies generally argued that the suitability
standard is outdated, and that the current regulatory structure is insufficient
to protect investors. Specifically, he
attacked the proposed FINRA best interest standard as “nonsensical,” arguing
that the FINRA proposal blurs the lines between those representing buyers and
those representing sellers.
During the first question, the
regulators stated that they do not view the rule as covering products such as
health and life insurance, but asked why, if a health plan is funded by
investments, such a plan would not need the protections of the proposed rule –
especially if the provider was able to “walk away” from funding the
benefit. Breyfogel emphasized that the major difference between such
plans and IRAs is that the provider, and not the beneficiary, bears the
Another regulator asked Saxon
and Roberts about how far their suggestion of “clear bias” would go, and
expressed skepticism concerning a contention that a professional calling
themselves an advisor during a 1-on-1 session would clearly be biased in the
offering of advice, though he did leave room for the possibility of providing
an exemption when a discussion is held in response to an RfP. Rhoades echoed the skepticism and stated that
he has had “hundreds of clients” who believed that the financial services
professional was acting in their best interests in such an exchange.
In response, Saxon and Roberts
argued that, given the different sets of facts and circumstances that arise
during any particular interaction, it was important that the DOL not rely on a
“blanket application” of the proposed rule.
The regulators then asked
Breyfogle, Saxon and Roberts if their clients would be able to accept a best
interest standard, combined with the proposed exemptions (specifically the best
interest contract exemption), if the requirements of the rules and exemptions
were more specifically stated. The regulators also appeared receptive to
conforming the proposed rule to certain existing insurance laws. All three panelists seemed amenable to such
possibility, and Saxon and Roberts reiterated their call for a re-proposal in
order to consider any changes DOL might make in that regard.
L. Stewart, Executive Consultant, Penn Mutual Life Insurance Company
McCaffrey, Chairman, Plan Sponsor Council of America (PSCA)
Naylor, Public Citizen
argued that there is no need for a fiduciary standard because the industry
currently acts in its clients’ interests.
said his organization supports the DOL’s proposal; however, they are
concerned with the restrictions the rule places on financial advice and
the higher fees caused by this rule.
stated that mandatory arbitration is a “fatal flaw” in the regulation, but
his organization supports the overall regulation.
Stewart stated that companies
like Penn Mutual will fire any professionals that do not act in their client’s
interests and allow for the prosecution of the former employee if it is
necessary. Secondly, organizations like
the Financial Services Professional Society can self-regulate by ensuring their
members take a pledge to serve in their client’s best interests.
McCaffrey stated that PSCA is
concerned with the restrictions the rule places on financial advice and the
lack of education the rule would create. Secondly, the higher fees caused by this rule
proposal would harm smaller savers. He
proposed that the DOL work within the framework of 961 in order to remedy this
situation. McCaffrey also called on the
DOL to give examples and clarify language in the final version of the
Naylor elaborated about
literature and the philosophical flaws in the way the financial services
industry operates. At the conclusion of
his remarks, he stated that his organization is opposed to the mandatory
arbitration clause of the regulation because it does not permit class-action
Hauser asked McCaffrey what
kind of specific pieces of advice should be allowed. McCaffrey stated that the professional should
be allowed to lay out specific options of plan before the contract is signed
between the professional and client. Hauser
retorted that McCaffrey’s interpretation of the rule was not correct because
the regulation allows for this kind of education.
Hauser asked Stewart if the
timing of the contract was a key contention for Stewart’s opposition to the
rule. Stewart said yes but that he would
need to see it in the final version for him to say it was agreeable.
Canary asked Stewart what kind
of education investors needed. Stewart
used two examples of different investors and the type of education he would
provide them. He said it would be
impossible to have a list of specific pieces of education that professionals
could give to a client.
B. Laby, Professor, Rutgers University School of Law
R. Allen, Chief Executive Office, J.J.B. Hilliard, W.L. Lyons, LLC
Stolz, Senior Vice President, Private Client Group Products &
advocated for the DOL to continue with its rulemaking in spite of the
arguments that the agency should defer to the SEC or FINRA.
sought a re-proposal of the DOL rule, noting that the FINRA proposal was
“on the right path.”
in calling for the elimination of the contract requirement from the Best
Interest Contract (BIC) exemption, noted that the debate is not a question
of whether advisors should act in their client’s best interest, but rather
a question of “how we get there.”
In his statement, Laby
provided background information on the difference between the suitability and
best interest standards, and called for the DOL to move forward with its
proposed fiduciary standard in the retirement space despite objections that the
agency should defer to others. Laby
stated that the DOL were the experts in the retirement space, and that the
industry was sufficiently sophisticated to deal with different standards on
Allen highlighted that the
vast majority of small-balance IRAs were in brokerage (as opposed to advisory)
accounts, and that smaller investors clearly preferred the brokerage structure.
As such, he argued that the rule is
unworkable in its current form, and that the proposed rule would have negative
effects on consumer choice, cost and access to retirement products.
Stolz advocated for standards
similar to the provisions in the Raymond James “Client Bill of Rights,” and
called for the DOL to ensure that the any proposed rule did not encourage
“Monday Morning Quarterbacking.” Specifically,
Stolz highlighted a number of issues with the BIC exemption, stating that other
professions held to high standards (such as doctors and lawyers) are not
required to enter into a specific contract. Instead, Stolz proposed a framework that
relied upon agency cooperation to use existing securities regulation and
processes to enforce a universal best interest standard (without the need for a
contract) and full disclosure of all relevant information.
Regulators inquired as to
whether, given the Raymond James Client Bill of Rights, the document’s
references to “advisors” and not “sales persons,” the document’s seeming
consistency with a best interest standard and its calling for full and fair
disclosure, as well as reasonable fees, the objections from Raymond James were
a result of operational issues. Stolz
replied that he believed the Client Bill of Rights was consistent with the
standard currently placed on advisors, and that it was unnecessary to require a
A discussion ensued between
regulators, Stolz and Laby regarding the necessity of the contract in the BIC
exemption. Laby noted that advisors
already sign a number of contracts with clients, and the rule would merely
shape the form of such contracts. Specifically,
Stolz claimed that the contract would place new requirements on advisors and
“lowers the work” for plaintiff’s in a lawsuit. Further, Stolz argued that anyone in business
would be conflicted in some way – even under the proposed fiduciary standard.
Subsequently, the regulators
asked Allen his opinion on previous objections to mandatory arbitration
provisions, and Allen replied that – from a regulatory standpoint – arbitration
is more professional and stronger than it has ever been.
Laby was asked his position on
the FINRA proposal, which was based on SIFMA’s suggestions. Laby stated that he
could not provide a position, because it was too difficult to tell what FINRA
meant by “best interest” in their proposal.
Regulators then inquired into
the panel’s opinions on the claim that the “without regard” language meant that
advisors could not be paid without having an interest in the recommendation. Laby stated that the rule could use more
“fleshing out,” and Stolz stated that more clarity would be helpful. The regulators responded that the rule was
“quite plain” that it does not mean an advisor cannot be paid or sell
Further, in response to a
question on whether additional guidance was needed in regards to variable
annuities, Stolz stated that it was important – when judging reasonable
compensation – to consider the compensation in regards to the lifetime of the
Finally, the regulators asked
for opinions on the education provision in the proposed rule. Allen stated that it was important for
advisors to be able to use specific examples when explaining products, in order
to be as informative as possible, while Laby stated that he thinks that the
current proposal “gets it right,” and that the question is whether the advisors
statements were “evaluative” of the product.
Collins, Senior Director of Industry and Financial Analysts, Investment
Reuter, Carroll School of Management, Boston College
Schoar, MIT Sloan School of Management
Wilkerson, Vice President and Chief Counsel, Securities and Litigation,
American Council of Life Insurers
was very critical of the DOL’s Regulatory Impact Analysis (RIA), calling
it “fundamentally flawed. He estimated that it would result in $109
billion in lost returns.
and Schoar argued in favor of the DOL proposal, citing evidence of some
brokers steering clients toward higher-fee funds.
discussed the UK’s Retail Distribution Review, noting that it has caused
11 million investors to fall into an “advice gap” and that the UK’s
Financial Conduct Authority is now reviewing the regulation.
Collins called the DOL’s Regulatory
Impact Analysis (RIA) “fundamentally flawed” for a three primary reasons: 1) it
does not compare the performances of fiduciary vs. non-fiduciary advisors; 2)
it misapplies the numerical results of key studies and overstates the rule’s
benefits; and 3) it fails to consider that investors may face increased costs
from a forced migration to fee-based accounts, or otherwise lose advice
altogether. He said the DOL’s projected
savings on $44 billion for investors is “totally unfounded” and offered an
estimate of $109 billion in lost returns instead.
Reuter discussed two papers
that he co-authored, arguing that conflicted advice is “both common and
costly.” Based on his evidence, he said
broker client portfolios are heavily tilted towards funds with higher costs. Schoar agreed that the current structure of
the advice market allows for conflicts that lead to sub-optimal advice, and
argued that fiduciaries do provide better advice.
Wilkerson offered many of the
same concerns as Collins, and added that the RIA uses outdated data and does
not consider the benefits of annuities and in-person advice. He also mentioned the United Kingdom’s Retail
Distribution Review (RDR), noting that it has caused 11 million investors to
fall into an “advice gap” and that the Financial Conduct Authority is now
reviewing the regulation.
Piacentini asked Collins
whether his examinations have attempted to isolate the potential scales of
conflicts of interest and whether performance varies with the size. Collins stressed that evidence shows people
are directing their assets to front-load funds that outperformed the average
fund or had below average expense ratios.
Piacentini then asked whether
advisor incentives have bearing on where funds are directed. Reuter answered that based on broker
portfolios he has seen, funds that pay higher commissions have higher
concentrations. Schoar turned attention
to the quality of advice, and stated that brokers tend to advise against
lower-fee funds such as index funds.
Piacentini asked what more is
needed to evaluate how people are faring under current protections. Wilkerson
replied that a full consideration of current rules is necessary, noting that
FINRA rules and supervision have changed since the initial DOL proposal.
On the RDR, Piacentini said he
is interested in the review now taking place and asked what lessons could be
drawn from the UK. He added, however,
that other factors may be impacting the demand for advice in the UK and the
associated “advice gap.” Wilkerson
conceded that the RDR is not identical to the DOL proposal, but stressed that
small savers critically need access to advice, especially to help manage times
Hauser suggested a need for a
comparison of how performance varies based on conflict, but Collins argued
instead that the best approach would be to study how investors perform with
fiduciary advisors as opposed to brokers.
Piacentini questioned why a
comparison of commission-based vs. fee-based models is needed if the proposal
is trying to preserve the commission model, but without “harmful bias.”
Mares denied that the proposed
rule would “force” a move to fee-based accounts. She asked why, if the industry supports acting
in the customers’ best interest, it would force investors into the fee-based
model. Collins said small balance investors
would not be able to access advice through fee-based models, and they would
then lose advice altogether. Hauser said
the DOL’s goal is to preserve both models, but to structure an arrangement that
preserves a commission-based model that tamps down on conflicts of interests.
asked if conflicted advice is better than not receiving any advice. Wilkerson repeated that not having advice is
very detrimental to small and medium savers. Collins turned the question, asking whether
the proposal should be forcing low-balance into a situation with no advice at
all, and stressing that investors should have a choice.
Bird, Senior Regulatory Economist, U.S. Chamber of Commerce
F. Cummings, Erivan K. Haub School of Business, St. Joseph’s University
Webb, Senior Research Economist, Center for Retirement Research at Boston
specifically focused on, and criticized, the DOL’s rulemaking process,
arguing that the Regulatory Impact Analysis (RIA) was insufficient and
lacked the necessary data to support such a rulemaking.
called for increased advisor education requirements, the removal of the
mandatory arbitration provision, and argued that industry contentions that
the proposed rule would limit investor access to advice were inaccurate.
strongly supporting the proposed four-part test to determine fiduciary
capacity and the expansion of protections to IRA and IRA rollover advice,
Webb stated that industry objections to the Best Interest Contract (BIC) exemption
were “minor wrinkles,” not “major obstacles.”
In his statement, Bird
specifically sought to address the process by which the DOL developed its RIA;
not the efficacy of the proposed rule itself. He emphasized the necessary of following a
“right process,” and criticized the DOL’s RIA for not relying on adequate data.
Specifically, Bird cited a failure to
fully examine alternatives and provide cost/benefit analyses, as well as a
failure to provide an adequate rulemaking baseline. Bird called for an updated RIA to be produced
and released for public comment.
Cummings acknowledged his
general agreement with the rule, but noted three areas that required specific
attention. First, Cummings contended
that there was a weak basis for claims that the proposed rule would limit
access to retirement advice, citing a study that showed advisors who
transitioned from a brokerage model to an advisory model saw “no change” to “an
increase” in business. He also
emphasized the need for improved training and education of advisors, arguing
that if an advisor does not understand a product, neither will the client. Finally, Cummings called for the removal of
the mandatory arbitration provision, claiming the provision would “limit the
benefits of the proposed rule.”
During his opening statement,
Webb provided an overview of the structure of the proposed rule and discussed
an outside estimate that conflicting advice results in a $17B loss annually –
which he believed to be a conservative estimate of actual losses. Webb voiced his strong support for the new
four-part fiduciary test, claiming that the current five-part test is “easily
avoidable,” and further supported the expansion of protections to IRA and
rollover advice. Webb specifically asked
for a removal of the platform providers carve out (and offered a few
alternatives), and stated that any objections to the BIC exemption were
“wrinkles” that only required some tweaking of the exception to address.
Piacentini referred to a
statement in Webb’s written submission which stated that if households were
unaware of fees, then fees would be inefficiently high. He asked Webb to explain this statement and
inquired to the state of the current market. Webb explained that if investors are unaware
of fees, then investment companies have an incentive to increase such fees. He further stated that he believed the current
market was segmented between those who understand fees and those who do not.
inquired about the reported unintended consequences of similar regulations in
the United Kingdom. Webb stated that
while he was not fully familiar with the situation, he believes the industry
“seemed to have coped relatively well” with the new requirements.
Piacentini then had a
discourse with Cummings concerning access to advice at affordable price points,
the role of robo advisors (whether such services were adequate for investors if
they were the only options available at certain price points), and whether new
business models were giving rise to new potential conflicts of interest. Cummings replied that firms are already
offering fiduciary advice at affordable price points and emphasized that tech
driven advancements were bringing in new advisors and leading to new
innovation. He stated that regardless of
the model and the conflicts, the important goal was to identify and address
said conflicts – not eliminate them.
Piacentini asked Webb to
discuss the relationship between product complexity and degree of risk. Webb returned to his opening statement and
argued for the education of advisors, arguing that lack of understanding of
complex products is likely an impetus for compensation-driven investment
advice. He noted that this is inherently
an issue of firm culture that the current proposal addresses.
Piacentini followed up by
asking Bird whether or not the RIA should seek to account for both unforeseen
benefits, as well as negative unintended consequences. Bird stated that the RIA should consider all
risks and uncertainties – good and bad – but that the existing risks and
uncertainties chapter of the RIA was insufficient. He further stated that more extensive reliance
on surveys, experiments, and data would serve to minimize such uncertainties.
Bergstresser asked Cummings
for specifics on how to incentivize training, to which Cummings replied that
the current proposal does so sufficiently.
Bergstresser then sought
specifics on possible surveys that would mitigate unintended consequences, and
asked specifically about the consumer finance survey. Piacentini joined the question by asking about
a GAO study, as well as an experiment that was discussed during the 8th
panel. Bird agreed that the GAO study
and the discussed experiment were the types of information that should be
relied upon, but that those specific items were only a start, and that such a
large rulemaking required significantly further study. Specifically, Bird criticized the 60 hour
estimate for development of BIC exemption templates, stating that the estimate
was “pulled out of the air.”
Neil Baily, Senior Fellow, Brookings Institution
Lee Covington II, Senior Vice President and General Counsel, Insured
- Baily opened his
statement by saying that the proposed rule mostly concerns the class, and
that those saving for retirement benefit from good advice. He
supported disclosures and advised that they be simplified for the
investors to understand. He commented that the DOL proposal risks
limiting access to advice, as is now happening because of the Retail
Distribution Review (RDR) in the UK. He stressed that the DOL should be
thinking about how to simplify the rule so that business models serving
small savers can continue to exist, even if they charge small fees,
because savers “are better off anyway.” He further called on the DOL to clarify
the line between education and advice, suggesting that standardizing the
information that can be provided could work. Overall, he said the rule could have
benefits with some revisions.
- Covington II said he
wants to ensure protections for those investing in retirement, while also
expressing his support of the benefits of annuities. He argued that
the Best Interest Contract (BIC) exemption is not workable enough to
feasibly support variable annuities and that trying to comply with the BIC
is economically impractical for some insurers.
Baily said that retirement savers can benefit from
good advice, but that information is asymmetric so it is difficult to get
perfect results. However, he says that
good advisors will make clients much better off, even if there are fees paid to
the advisors. In regards to disclosure, he
felt that a standard form that lists and outlines the fees is a good
alternative to the current rules, which limit access to advice. This is occurring now in the UK, and the DOL
should be considering a way to simplify business models adopted for small
savers. While the DOL argued for more
online solutions, Baily claimed that face-to-face interaction is still
needed. He argued that a “MyRA” account
is not a good option, because the rate of return is too low for any truly
beneficial savings to take place.
Lastly, Baily discussed the need for clarity between education and
Covington came out by thanking the DOL for their
collective effort when drafting this rule, but remarked that their letter
requested changes to the proposal. He
started out by talking about annuities and the benefits that they provide. He claimed that since American’s are living
so long, there is a major risk of outliving savings, and that one of the only
ways to have guaranteed lifetime savings is through annuities and IRA
rollovers. He also said that work must
be done to ensure that access to annuities are not affected by the rule.
Covington then expressed his concern that the BIC exemption
was not feasible for annuities and that it is important to emphasize rule
84.24. Even if the requested changes to
the BIC exemption were adopted, insurers would still have to undertake costly
changes to determine the applicability of the exemption to various
transactions. Also, he argued that there
was a lack of clarity on the responsibility of insurers. He offered solution to restore Variable
Annuities to the 84-24 rule.
Piacentini asked Baily how to
balance incentives that create conflicts of interest while preserving access to
advice for middle and lower income investors. Baily responded by mentioning the importance
of people receiving good advice, and that receiving this advice is worth facing
some conflicts of interest.
Piacentini asked if a general
disclosure of fees could be effective. Baily
said a middle ground is needed between an incomprehensible disclosure and one
that is overly simple.
Piacentini asked Covington
how, if compensation and fee data is often fragmented, an institution can
monitor fee arrangements and ensure they are operating in the best interest of
clients. Covington responded by
explaining that institutions would look at the current regulatory scheme, and
explained that there is supervision in place to ensure compliance with client
best interest in mind.
Hauser asked Covington what
concerns he had with the BIC exemption. Covington
pointed to regulatory requirements and operational impacts, and noted that
major concern was that the exemption does not work effectively for
Hauser asked Covington
whether, if the DOL were to address his operational concerns, the proposal
could be feasible. Covington answered that this would be a large assumption,
but that he is willing to look at the proposal.
Mares asked whether there was
a mechanism for consumers to shop with comparisons between fixed annuities. Covington explained that there were such
mechanisms and they were often web-based.
Crosby asked Baily to explain
his points on the UK reviewing the RDR, claiming the studies he had read had
been yielding good results. Baily
explained that although there were some gains from the rule, there had also been
a decrease in access to financial advice.
Derbyshire, Senior Vice President and Deputy General Counsel, Fidelity
Garrett, Founder and President, Garrett Planning Network, Inc.
Nelson, CEO, Retirement Voya Financial
said the proposal has two fundamental problems: 1) it attempts to mitigate
all conflicts of interest, despite the fact that such conflicts are wholly
inherent in any relationship between a buyer and seller; and 2) the
exemption structure in the proposal in largely unworkable.
lauded the DOL’s work, and insisted that fiduciary advisors would still be
available and accessible to all people to provide objective, competent
offered three specific areas most in need of revision: 1) the BIC
exemption, which he said is not practical and must be streamlined; 2) the
large plan exclusion, which he said is far too limited; and 3) the
restriction on education activities, which could have even bigger costs
than the conflicted advice the overall proposal seeks to address.
Derbyshire said the DOL’s
current proposal is unworkable because of two fundamental problems: 1) it
attempts to mitigate all conflicts of interest, despite the fact that such
conflicts are wholly inherent in any relationship between a buyer and seller;
and 2) the exemption structure in the proposal in largely unworkable. To remedy these problems, he offered
Fidelity’s proposal that the rule should separate the rules of engagement from
actual investment advice, with all advisors being clear about their services,
fees, and potential conflicts. Additionally,
he said the exemption structure should be much broader and more
Garrett lauded the DOL’s work,
saying a failure to update current rules leaves Americans vulnerable to
conflicted advice. She noted that
investors typically believe anyone giving them advice does so according to the
client’s best interest, but because this is not true Americans are paying a
“heavy price” in lost retirement income. She said fiduciary advisors would still be available
and accessible to all people to provide objective, competent advice.
Nelson stated that despite the
proposal’s “admirable intentions,” it fails in its goals because of unintended
consequences that will reduce access to advice. He offered three specific areas most in need
of revision: 1) the BIC exemption, which he said is not practical and must be
streamlined, and whose new and untested legal liabilities could mean it will
not be used by advisors; 2) the large plan exclusion, which he said is far too
limited; and 3) the restriction on education activities, which could have even
bigger costs than the conflicted advice the overall proposal seeks to address.
Hauser asked Nelson about his
proposed “customer bill of rights,” which would replace the BIC exemption. Nelson said the bill of rights would be an
upfront disclosure to help investors understand the role an advisor plays and
the types of compensation he would receive.
Hauser commented that it
seemed that Voya Financial was not comfortable with having a best interest
standard imposed on its advisors. Nelson
stated that such a characterization was not fair, and that Voya is in favor of
acting in the interests of its client – but that doing so does not necessarily
mean following the ERISA definition of best interest.
Hauser asked Derbyshire about
his proposal and its disclosures, noting that it would not specifically explain
all products and compensations. Derbyshire
answered that it goes back to the discussion of the proper balance of
information, saying that incorporating everything into a single disclosure
would not be doable but that offering a range of compensation would be
Hauser asked if firms would be
prohibited from creating incentives that might go against the best interest
standard. Derbyshire explained that
financial institutions should be responsible for establishing their incentive
structures and supervising their advisors appropriately.
Turning to Garrett, Hauser
asked about the proposal’s impact on small savers. Garrett noted that her firm has no minimum
account sizes that would disqualify investors with modest assets, and that
groups like the Financial Planning Coalition and CFP Board also offer advisors
who would be willing to work with the low and middle income market.
- Stephen W. Hall, Securities Specialist,
Better Markets Inc.
- Bradford Campbell, Outside Counsel, US
Chamber of Commerce
- Joe Collins, Certified Fraud Examiner
- Hall stated that his organization agrees
with the rule, while urging that the DOL make the regulation final as soon
as possible. Additionally, he
stated that the mandatory arbitration should be replaced.
- Campbell argued that the rule hurts the
way small businesses operate and their employees. The Chamber's members believe that the
regulation leads to a lack of advice and hurts smaller retirement
- Collins stated that he was in the business
for many years and saw bad practices that led him to become a
certified fraud examiner. He said
professionals are incentivized to act against their client's best
Hall stated that his organization
agrees with the rule and urged that the DOL make the regulation final as soon
as possible. He argued that the DOL is
the entity to put this regulation in place because Congress gave it the
authority to regulate retirement accounts. He added that the mandatory arbitration should
be replaced because it is not what Congress intended and it leaves customers
without legal options.
Campbell argued that the rule
hurts the way small businesses operate and their employees. The Chamber's members believe that the
regulation leads to a lack of advice and hurts smaller retirement accounts. Moreover, the regulation would require savers
to replace fee-based accounts with transaction-based accounts, which leads to
higher costs for savers. He also stated
that the list of assets in the rule is too prohibitive and lead to only
specific assets being sold. Campbell
ended his comments by stating that eight months is not a long enough timeframe
because it will be too costly for small businesses.
Collins said he was in the
business for many years and saw bad practices that led him to become a
certified fraud examiner. He also stated
that professionals are incentivized to act against their client's best
interests, and this is why the regulation may not go far enough.
Hauser asked Campbell if the
DOL went back to a regulation that would show clients all investment options,
would the Chamber agree with it. Campbell
responded that they would have to see the final wording of that part of the
regulation in order for the Chamber to say it works for them.
Lloyd asked Campbell about why
the regulation prevents advisors from discussing specific assets. He responded that if the assets an advisor
wants to discuss are not on the DOL’s list, then the advisor is discussing
prohibited assets. Hall retorted by
saying the list is appropriate.
B. McShea, General Counsel, Janney Montgomery Scott LLC
McNeely, NAIFA President (with Dr. Jennifer Knoll)
Peiffer, President PIABA, Peiffer Rosca Wolf Abdullah Carr & Kane, PLC
called the Best Interest Contract (BIC) exemption “unworkable,” and stated
that his organization would not avail themselves of the exemption; leaving
40,000 existing customers without access to advice.
also claimed that the BIC exemption was “unworkable” in its current form,
and argued that the true cost of the proposed rule would be the cost of
“lost advice over time.”
of the Public Investors Arbitration Bar Association, stated that he had
never had a client that understood that an advisor owed them a lower duty
of care than that of a doctor or a lawyer, and that mandating a fiduciary
duty would not lead to a drop in retirement advice access as many have
In his statement, McShea
echoed SIFMA’s CEO Ken Bentsen and stated that the implementation of the
proposed rule is at least as important as the rule’s intention. McShea further stated that, while he is in
favor of a uniform higher standard in investment advice, he believed the
current proposal would result in an outcome opposite its intention. He argued that the proposed rule would result
increased investor confusion and cost, and would eliminate investor access to
education and advice. In addressing the
BIC exemption, McShea referred to the Deloitte study put forward as part of
SIFMA’s testimony, and stated that his organization “would not avail ourselves
As part of her opening
statement, McNeely asked one of her personal clients, Dr. Knoll, to discuss her
experience with McNeely. Dr. Knoll
provided an overview of her small business and her relationship with McNeely,
stating that she was aware of the conflicts and the availability of fee-based
services, but the commission-based structure was the appropriate structure for
her business and her needs. McNeely argued
that this proposal would be a “win” for fee-based advisors (who generally work
with wealthier clients and avoid products, such as annuities, that are lees
helpful to wealthier clients), and that it would come at the expense of new
investors, small investors, and small businesses. Further, McNeely echoed McShea in stating that
the BIC exemption was “unworkable,” and that it would lead to a loss of
investors and increased litigation.
Throughout his statement,
Peiffer highlighted his personal experiences as an attorney working on behalf
of investors who had lost large amounts of their life savings. He discussed the damaging effects of such
loss, and claimed that the vast majority of such losses resulted from
conflicted advice – particularly conflicted rollover advice. Specifically, Peiffer cited a study that found
that conflicted advice cost investors $17B annually, and claimed that the
proposed rule would likely lead to less lawsuits (as the conflicts would be
addressed at “the front end”). He also
stated that the rule would not result in lost access to advice, noting that a
number of states already require a fiduciary standard, and that studies show no
loss of access in those jurisdictions.
Campagna asked McNeely to
explain her written comments seeking to exclude distribution advice from the
proposed rule, and specifically asked if such advice would be coupled with
particular investment recommendations. McNeely
replied that the inclusion of an investment recommendation would depend on the
client, but given the importance of advice on distributions, such advice should
be explicitly excluded from the proposed rule.
Hauser asked McNeely whether
she believed the BIC could be a workable exemption if a number of changes were
made, such as making it a simple document or only requiring a notice to
existing customers. McNeely responded
that a number of particular issues would have to be addressed, including: the
timing of the contract (i.e. application to new clients only and allowing the
contract to be signed at the point of sale), the listing of warranties and an
explicit statement that variable annuities and proprietary products could be
considered to be in a client’s best interest.
Hauser then asked Peiffer about
his view on the binding arbitration provision, and whether he believed there
was a difference between the suitability standard and a best interest standard.
Peiffer stated that there was
“absolutely” a difference, and that while PIABA opposes the binding arbitration
provision, the organization chose not to comment on the issue as they would
rather have the proposed rule than investor choice in arbitration.
Piacentini asked McNeely about
her considerations in switching broker-dealers, and the role of technology,
compensation, and products in that choice. McNeely stated that her choice to change was
solely one based on technology – she believed the products were essentially the
same and her compensation structure did not change (in fact she now pays more
fees to the broker-dealer) – but she made the change to access better
technology to better serve her clients.
Finally, Campagna asked
McNeely about her written comments seeking an expansion of the seller’s
exception, and her contention that the education exemption should allow for
specific examples. McNeely stated that
she would follow-up with regard to the seller’s exception, and that she
believed that an investor should be able to receive as much advice as possible
– at both the plan and IRA levels – until the point of making a recommendation
Moslander, Senior Managing Director, TIAA-CREFF
Freese, Senor Policy Advisor, Pension Rights Center
Szostek, Vice President Taxes and Retirement Security, American Council of
Moslander recognized that the DOL’s goal was to put retirement savers’
interests first, but felt there were certain modifications that could be
made. He supported the best interest standard, and felt as though it
should always be the standard used by financial advisors. Lastly, he
discussed annuities and the difficulties the education carve-out may
Freese came out in support of the DOL’s proposed rule, claiming that
brokers are not immune to understanding financial incentives, arguing in
support of the definition of fiduciary and also declaring the BIC
exemption workable and appropriate.
Szostek opposed the rule, attributing the negative consequences to the
totality of all the individual problems. He raised concerns about
the BIC exemption, the definition of fiduciary and the difference between
education and recommendation.
Moslander began his testimony
by mentioning that his company sought out to “serve those who serve others,”
and that the DOL took on a similar objective when crafting this bill. However, he suggested that there are certain
modifications that should be made. Most
important, Moslander mentioned modifying the education provision to clarify and
allow for ample access to education. He
felt, however, that once advice is individualized and recommendations made, the
fiduciary standard must be met.
That said, he disagreed with a
“one-size-fits-all” concept, noting that some people benefit from an IRA
rollover, however it is vital that the saver understand the risks of the
rollover. He also requested that in the
education carve-out, such rollover distribution education is referenced and
clarified. When discussing annuities, he
praised the products, mentioning the benefits they offer – benefits the rule
might jeopardize. He argued that, without
clarification in the education provision, advisors run the risk of making it
hard to educate consumers on, and sell, proprietary annuity products.
Freese discusses the benefits
of the rule, and admired the work the DOL had done. She felt as though advice regarding
distributions should fall under the fiduciary standard. Also, she felt as though the boilerplate
disclosure should not provide insulation for the advisor. Lastly, she pointed out that the BIC
exemption was appropriate and workable, though it could be strengthened;
specifically in the area of rollovers and call centers. She mentioned that, though it may seem
obvious when something is a sales pitch, good salesmen or saleswomen will make
it seems like a trusting relationship.
She ended by stating that American’s rely on advisors to appropriately
guide them to correctly manage their retirement savings, and that unless the
best interest standard is protected, ERISA won’t be able to protect savers.
Hauser asked Szostek what he
thought about the fiduciary standard including advice given related to
distributions. He responded that he agrees that when a call to action is
initiated, it can be considered under the standard.
Hauser then asked
Moslander what alterations he would make to the education provision.
Moslander said his concerns fall with the applicability to proprietary
products. Szostek also noted that the text itself lacked clarity.
Hauser followed-up by asking
whether a cut-out would still be needed if the language is clarified to
separate education from recommendations. Szostek responded that the
totality of all the minor issues of the rule caused concerns, and they would
need to look at the proposal in its entirety.
Hauser asked Szostek about his
concerns on the affiliation provision, to which he responded that he would be
willing to get back to him on all the specifics.
Canary asked whether there
would be concerns with the education carve-out, seller’s exemption, and
mutuality requirement in the expanded definition of fiduciary. Freese responded
that there would be significant concerns, even if an individual exemption is
expanded. Moslander responded by urging the DOL to be careful when
expanding provisions, but that it can be beneficial if done correctly.
Szostek felt as though the concerns raised can be addressed and solved beneficially.
Hauser asked for concerns regard
the BIC exemption. Moslander indicated his concerns related to the
education carve-out and the training and sequencing of when the BIC exemption would
apply. Szostek and Moslander both agreed that clarity was the most
important part of the exemption. Szostek went further and explained that
in the past, the exemptions were “if... then” scenarios, while this one is a
“maybe,” which would cause concern in the industry.
J. Callahan, Chief Marketing Officer, ValMark Securities Corp., on behalf
of the Association for Advanced Life Underwriting
Wimpee, Farmers Agent, Farmers Insurance and Farmers Financial Solutions
Thissen, National President, National Active and Retired Federal Employees
- Callahan stated that the DOL should build
on its existing framework to accomplish its goals and require a simple
one-page disclosure that explains costs of a product.
- Thissen expressed concern that holdings in
thrift savings plans (TSPs) for federal employees and service members are
not protected and said that people have been receiving bad advice when
they are told to move funds from TSPs over to financial institutions.
- Hauser said the proposal is “not about
brokers vs. advisers” and that the DOL aims to permit all models to move
forward. He said the DOL is “trying
to do light touch regulation” and require firms to “hold yourself out as
giving the best advice to consumers.”
Callahan stated the DOL should
build on its existing framework to accomplish its goals and require a simple
one-page disclosure that explains costs of a product. He noted that recent changes to disclosure
rules have resulted in an increase in fee-based accounts compared with broker
commission plans. Callahan stressed the importance of annuities and said that
the DOL’s rule would prohibit new products created in response to the Treasury
Department’s proposal on annuities last year. Callahan also said the DOL proposal sends
conflicting messages given the SEC’s fiduciary standard, and that the SEC would
be best positioned to implement this framework. He concluded that savers must have the ability
to choose for themselves the products that are in their best interest.
Wimpee gave anecdotal evidence
from his business explaining the importance of being able to provide education
and recommendations to his customers at low costs. He noted that most of his business’s revenue
is generated from insurance rather than sales, which allows him to be
“unemotional” about customer’s money. He
said the proposal would require him to pass on more costs to his customers.
Thissen supported the proposal
and expressed concern that holdings in thrift savings plans (TSPs) for federal
employees and service members are not protected, noting that more than 50
percent of people leaving service remove their funds from TSPs. He said
that TSPs have lower administrative costs than IRAs and that people have been
receiving bad advice when they are told to move funds from TSPs over to
Hauser noted that the proposal
does not prohibit the sale of annuities or the use of brokers and asked what in
the proposal prompted comments that suggest this. Callahan noted that when “digging in” to the
exemptions the marketplace will remove access to certain products.
Hauser asked why the proposal
does not reduce the level of investor confusion, noting that investors expect
all advisors to be acting their best interest. Callahan said that adding another standard
with different definitions that overlap standards by the SEC will cause more
confusion, noting that registered and non-register annuities have “two
different paths” for standards.
Hauser said customers look to
advisers for expertise and recommendations in their best interest and
disclosure “does not get at this.” Callahan
said it is a false choice to suggest the there should be “regulation or none”
and explained that it is easier to put money in a best interest account than a
FINRA-regulated broker dealer regime.
Canary asked what dispute
resolution system or alternatives to the FINRA model exist for circumstances
that are not subject to arbitration. Wimpee
said he did not know what the resolution system would be, but supported the
idea of having a clear disclosure that allows a broker to give good advice,
noting that some investors have different needs and must be able to choose
their best products.
Canary asked if the rule
should cover life insurance if it has an investment component and if welfare
programs should be covered. Callahan said he is “not sure this is the
most pragmatic approach.”
Canary said that annuities are
already subject to different regulatory structures under 84-24. Callahan agreed and said this does not reduce
confusion. He added that the FINRA regime is “far more robust.”
Cosby asked how compensation
structure works in Wimpee’s firm and if there is variable compensation or flat
fees. Wimpee said his business does not currently have a mechanism to charge a
fee, but that the proposal will force his business to create one. He noted that his company charges an upfront
commission and then adds the 12b-1 fees in the funds. Cosby then asked how compensation works for
lifetime income products and if they influence how advisers advise on these
products. Callahan said that most funds
are fee-based and that variable annuities are based on commission. He said compensation is filed with the SEC as
a standardized commission schedule.
P. Cleary, American Bankers Association, Senior Vice President, Northern
Valenti, Director of Consumer Finance, Center for American Progress
Larson, Director, Regulatory and Strategic Initiatives, Russell
focused his statements on the need for DOL to narrow the scope of the
proposal in general and, more specifically, to exclude institutional
advocated in support of the proposed rule and argued that investors of
“modest means” were the ones that would be most helped by the proposed
rule – despite what other panelists have suggested to the contrary.
echoed Cleary’s call for a focus on retail investors, and identified areas
to either narrow the scope of the rule or alter its mechanism.
In his statement, Cleary
criticized the proposed rule for being “overbroad” and identified three primary
areas of concern: 1) the definition of “recommendation”; 2) the inclusion of
the institutional market; and 3) the inclusion of statements of asset value. Cleary expressed concerns that the definition
of “recommendation” in the proposed rule would prevent banks from offering a
number of important services to clients by covering a number of communications
where neither party would reasonably believe a special relationship existed. Cleary suggested limiting the definition to
only include instances of “clear investment advice” when “both parties” would
be aware that the communication involved investment advice.
Cleary further argued that
there was neither evidence of a problem in the institutional market, nor
evidence that the current institutional market – which is currently operating
off of 40 plus years of legal precedent – would benefit in any way from a new,
untested standard. Cleary also expressed
concern that routine statements of value (such as a report of trust holdings)
that are not provided based on a legal obligation would trigger the obligations
of the proposed rule, and suggested that all statements of value that solely
contain financial data be excluded from the rule. He specifically referenced FINRA Rule 2111(b)
as part of this discussion.
Throughout his statement,
Valenti discussed the retirement savings crisis and its impact on a large
number of Americans. He also argued that
the suitability standard has been rendered outdated by the market shift towards
defined compensation plans. He further
highlighted the benefits of low cost plans, the dangers surrounding rollover
advice, and the important protections the proposed rule would provide to
“people of modest means.” Additionally,
Valenti noted that while he fully supported increased disclosures, any rule
that relied on disclosure alone would “miss the point” of protecting consumers
when they enter into a perceived relationship of trust.
Larson emphasized the social
and economic imperative of increasing retirement savings, though he noted that
the focus should be on retail investors. He stated that the rule provided “no clear”
benefit to institutional or sophisticated investors, and that he believed the
seller’s exemption was too narrow. Larson further argued that the proposed rule
should only apply to small and individual accounts. Additionally, Larson stated
that the DOL should enable state and open multi-employer plans (MEPs) and that
Russell was “eagerly awaiting” DOL guidance on the matter. Larson subsequently advocated removing of the
low cost safe harbor exemption from the rule and replacing it with an exemption
along the lines of the “QDIA” (Qualified Default Investment Alternative).
Canary asked Larson and Cleary
to clarify remarks concerning removal of the institutional market from the
rule, and asked if they were concerned “textually” with the “plan fiduciary”
language. Larson reiterated that there
was no clear benefit to institutional investors being covered by the proposed
rule and that the initial scope of the rule should be limited, instead of
creating an institutional exemption. Cleary
also reiterated his call to narrow the definition of investment advice (which
applies regardless of the recipient) and to use a standard more akin to FINRA
Canary followed-up by asking
the best way to identify “sophisticated investors,” and asked how the panelists
would propose excluding such investors from the rule. Cleary and Larson both stated that existing
securities law was a good starting point for identification purposes. Valenti emphasized that such identification
should not rely on a means test and that the DOL would also have to “consider
taxpayer interest” in the development of the standard. Larson stated that if the proposed rule was
suitably narrow in scope, then a sophisticated investor exemption with relaxed
conditions “made sense.” Cleary also criticized the proposed seller’s exemption
for being unclear in “how far it goes.”
Canany asked Valenti for his
position on the mandatory arbitration provisions in the Best Interest Contract
(BIC) exemption. Valenti stated that his
comments were along the same lines of previous panelists, and explained that
consumers do not understand arbitration agreements, nor do they have a choice,
as nearly all services require signing such an agreement.
Canary then inquired as to
Valenti’s stance on the proposed rule covering Health Savings Accounts (HSAs). Valenti responded that HSA coverage was
important, unless the DOL wanted to engage in “regulatory whack-a-mole,” as a
result of advisors suggesting clients move funds into non-covered accounts. He also discussed 529 college savings accounts
in his comments.
Hauser questioned Cleary on
his proposed “mutual agreement” standard for defining who and what is covered
by the proposed rule, challenged Cleary with specific examples (notably the
instance of a client who believes a fiduciary relationship exists, but where
the advisor does not due to a contract disclaimer), and asked if an “objective
test” to determine fiduciary capacity might be simpler. Cleary responded that he believed that
disclaimers, coupled with specific limits on professional actions, would be
sufficient to address DOL concerns. Larson
stated that he believed an objective standard would work, as disclaimers and
disclosures are not effective.
Valenti subsequently noted
that effective disclosures are clear and targeted, and advocated for the use of
“20/20 disclosures,” which allow for a clear comparison between products along
a specific baseline. Larson implored the DOL to avoid over-focusing on less
important considerations, such as conflicts and fees. He stated that conflicts will always exist and
that while fees are important, they are not nearly as important a factor as
whether people are saving or how much they are saving. He expressed concerned that any over-focus on
fees may steer investors away from investing in the first place.
Hauser emphasized that the
proposed rule was about “mitigating, not eliminating” conflicts, and stated
that the proposed rule clearly did not apply to “any nugget of information,” as
suggested in Cleary’s written testimony. Cleary responded by calling for more specific
examples, especially concerning “drawing the line” at the mention of a specific
Supovitz, President-Elect, American Retirement Association
Rouse, Executive Director, SPARK
said ARA is supportive of the DOL’s efforts to impose a best interest
standard, but that “disconnects” in the proposal would undermine its
members efforts to serve clients in the best way possible.
said fiduciary standards should only apply where there is a clear
expectation of the part of the client for one, and he commented that the
proposal’s definition calls into question a variety of communications that
cannot be reasonably viewed as investment advice.
Supovitz said ARA is supportive
of the DOL’s efforts to impose a best interest standard, but that “disconnects”
in the proposal would undermine its members efforts to serve clients in the
best way possible. She offered specific
concerns: 1) the proposal could discourage advisors form working with workplace
plan participants on rollovers, and a specific exemption independent from the
BIC exemption is needed; 2) for investment education, when models for 401(k)
plans are presented, the presenters should not themselves have to be
fiduciaries as long as the model is populated by ERISA fiduciaries; 3) the
definition of retirement advisor in the BIC exemption should be expanded to
include small business retirement plans; and 4) there should be a minimum two
year transition period for compliance with the rule.
Rouse said fiduciary standards
should only apply where there is a clear expectation of the part of the client
for one, and he commented that the proposal’s definition calls into question a
variety of communications that cannot be reasonably viewed as investment
advice. Because of the broad definition,
however, he stressed the importance of carve outs and called for expansions of
the seller’s, education, and selection monitoring carve outs. He also said the BIC exemption is not a
workable solution for plan servicers, and called for a 36 month period before
the implementation of the rule.
Canary asked if communications
that are not individualized would be covered under the investment advice
definition. Rouse said the line should
be clearly drawn to include instances with specific calls to action on a
recommendation. He said that under the
current proposal, even if a communication is not individualized, it is covered
by the definition if it is specially directed.
Cosby asked Rouse why the DOL
should not adopt FINRA standards for what constitutes a recommendation. Rouse answered that FINRA standards do not
apply in the same way for retirement, and that a reasonableness standard should
be used instead. He explained that the
FINRA standard was created for different regulatory structures.
Canary asked about the
platform provider provision. Rouse said
that under the current rule, recommending a platform provider makes a service
provider a fiduciary, but that this should not be the case.
Cosby asked Supovitz to expand
on her concerns that the proposal could cut off advice to small business
owners. She explained that the BIC
exemption is not available for the small plan market, and that this is just one
of the issues with the BIC.
Cosby asked if the
counterparty care out should be open to plans of all sizes. Supovitz said the ARA does not necessarily
have an issue with the current provision.
Canary asked whether
recommendations regarding third parties or affiliates should be considered
fiduciary advice. Supovitz answered that
it should, especially if a fee is collected as a direct result of the
Marcus Stanley, Policy Director, Americans for Financial Reform
Brown, President and CEO, Financial Services Institute
Mark Smith, Sutherland Asbill & Brennan LLP, on behalf of FSI
Poolman, Executive Director, Indexed Annuity Leadership Council
highlighted concerns with PTE 84-24, specifically regarding the definitions
of “insurance commission” and “reasonable compensation.”
commented that the application of different rules and standards to
different types of accounts would be expensive and difficult to comply
with, and urged functional coordination between the DOL, SEC and other
argued that the DOL should be implementing a fiduciary standard because it
is the only entity with the power to create a consistent standard across
all retirement assets.
Poolman said extending a legal
fiduciary standard to those selling fixed income annuities would only reinforce
what has been a reality for years, but that the details of the final rule will
be the difference between simple reinforcing these standards of conduct and
hurting the abilities of insurance agents to serve their clients. He highlighted concerns with PTE 84-24,
specifically the definitions of “insurance commission” and “reasonable
compensation.” These constructive
changes, he said, would not undermine the DOL’s objectives and ensure that
insurance agents have transparent and fair standards.
Brown noted that FSI has
consistently supported a uniform fiduciary standard, but that the current DOL
proposal is too complex and unworkable. Smith
then explained specific concerns with the BIC exemption: 1) the proposed
conditions governing compensation practices are not business model neutral, and
do not provide advisors a clear path; 2) the written contract requirement is
operationally challenging and inconsistent with investors expectations; and 3)
the disclosure regime is too complex, overwhelming, and duplicative. He added that the application of different
rules and standards to different types of accounts would be expensive and
difficult to comply with, and urged functional coordination between the DOL,
SEC and other regulators.
Stanley stated AFR’s support
for the DOL proposal, arguing that it would save retirement savers billions of
dollars annually and that none of the critiques he has seen of the rule have
been convincing. He said the DOL must
not weaken its proposal by further accommodating financial industry concerns. Stanley further argued that the DOL should be
implementing a fiduciary standard because it is the only entity with the power
to create a consistent standard across all retirement assets.
Piacentini asked about
disclosures of compensation structures to investors and how such disclosures
might affect investors’ decisions. Smith
tried to explain that providing disclosures could affect decision making, but
that he would have to think about the impact on investment results. He clarified, however, that a disclosure-only
approach is not what he was advocated for, and that it should be coupled with a
sensible regulatory compliance regime.
Piacentini asked if the
commissions for fixed annuities cluster around a single point. Poolman answered that there is a “pretty
compressed” range, and that including some sort of standard in an annuity safe
harbor could give consumers basic protections.
Piacentini asked if an
enforceable best interest standard would cause the variation in compensation
for advisors across different recommendations to “naturally disappear.” Stanley agreed that variation would lessen
because it only exists to steer advisors to certain recommendations.
Hall asked about the
workability of the BIC exemption. Brown
said he sees no structural reason why brokers cannot serve the best interests
of clients, but that the biggest issue with the BIC exemption is certainty that
a path for a commission-based model to thrive would remain.
Hauser stated that more
comments on specific procedures that would allow the BIC exemption to work
would be very helpful because the DOL is not seeking to eliminate the
commission-based model, but rather to prohibit incentives that run contrary to
the best interest standard.
Rittenhouse, Director of Capital Market Policy – Americas, CFA Institute
M. McBride, Chair, Committee for the Fiduciary Standard
A. Mason, Davis & Harmon LLP
Rittenhouse came out in
support of the DOL’s rule, and especially appreciated their aim to put the
client first.She proposed simplifying
certain aspects of the rule, while taking measures to reduce the cost of
compliance and clarify when someone would become legally liable.
McBride claims that the
DOL is doing a great job of attempting to fix the problem that Wall Street
created, which resulted in loopholes leading to the depletion of retirement
accounts.She then spent time talking
about the dangers of rollovers, which could result in a loss of money when
savers need it most. Next, she attempted
to debunk “myths” found in the arguments against the DOL rule. Lastly, she spent time discussing the
perverse effects of disclosure.
- Mason came out against
the DOL rule, utilizing surveys that he had conducted.These surveys found that no financial
institution would utilize the BIC exemption, and those that would consider it
would not be planning to utilize it within the eight month timeframe. He also felt as though with the rule as
written would make the jobs of these firms incredibly difficult, arguing that
it would “be the only business that couldn’t promote their services.” He cited the UK scenario, in which a similar
provision was implemented which caused a mass exodus from the small account
model. He ended by offering solutions to
Rittenhouse supported the
rule, especially in regard to putting the client first. She felt that there should be one standard
for all brokers, advisors, and financial counselor. Further, she argued that all investors should
trust their advisors, and that without this trust, they most likely won’t be
confident in how their money is handled.
Rittenhouse declared that the current five part test is inadequate and
allows for conflicted advice, which results in higher costs. She did not give any credit to the claim that
conflicted advice is better than no advice at all and also argued that, if this
rule is implemented, then the services for low or middle income investors will
be limited. Lastly, she argued that the
BIC exemption was too complex and lacks practicality, which could result in diluted
McBride opened her testimony
by thanking the DOL for attempting to solve the problem that Wall Street has
created, and that this challenge of the status quo is overdue. She then spent her time discussing three
things, including: IRA rollovers, “myths” related to the rule, and the perverse
affects of disclosure. She argued that
those who don’t know that advice is conflicted will be more likely to rollover
to an IRA, which could result in them losing money when they need it most. She stated rollover advice was more like a
sales pitch than advice. She declared
the proposal to be “workable, doable, and profitable.”
McBride then spent time
attempting to debunk some of the arguments used by opponents of the new DOL
rule proposal. First, she claimed the
myth that it cost more to receive advice from a fiduciary is untrue, using data
from an FI360 study. Lastly, she claimed
that disclosures are effective, and particularly beneficial for advisors who would
be able to insulate themselves from liability.
She supports this by arguing even advisors with good intentions can
still give bad advice because it would benefit them.
Mason thanked the DOL for
agreeing to hear his testimony, however he found some issues with the rule as written. The main point he made was that the DOL and
the retirement community have an opportunity to do good for all investors. He argued that, of the professionals he
worked with, not one would use the BIC exemption – and even if they had entertained
the idea, they would not do so within the eight month transition period. He also stated that the ability to assist
small businesses would be severely limited, and those programs meant to help
those businesses would be removed. At the
end of his testimony, he offered a couple issues he would like to see solved,
including the best interest standard, the inability for those in the industry
to promote their products like every other industry, and the unworkable
prohibited transaction provision.
Hauser opened the question
period by briefly discussing the areas of agreement, which he was discussing
with Mason. The two agreed that a best
interest standard should exist, though the specifics of it were up for
Hauser then recognized that
most of the areas of disagreement were operational issues, and gave an example
of excluding rollovers from the BIC exemption.
When Hauser inquired upon
Mason’s stance on the best interest standard in the BIC exemption, Mason
responded by expressing concern with the “without regard” language, and
explaining that he feels it prohibits considering one’s own compensation.
Hauser then asked about the
“sky-is-falling” theories, which dictated that as a result of the proposed rule,
the market would collapse. Hauser
explained, he “surely does not have that kind of power.” Mason responded to Hauser’s belief, arguing
that people doubted the theories recognizing the upcoming danger of pension
systems, but they are currently in a bad situation.
Hauser then discussed the
survey used by Mason, which Hauser deemed as slanted. Mason responded by saying the way he
described the rule in the scenario is how he, and other professionals in the
industry, believe it to be.
Piacentini asked whether he
thought the current rule would make it impossible to provide small business
services, to which Mason responded by saying that the current rule prohibits
it, because such services would be considered prohibited transactions.
- Michael L. Hadley and Joseph F.
McKeever, Committee of Annuity Insurers
- Edmund F. Murphy III,
President, Empower Retirement
- Jason Bortz, Capital Group Companies
- Hadley primarily spoke about his
organization's concern with the regulation's potential impact on advice
- Murphy focused on his view that
the education portion of the rule should be changed so that
fiduciary advice is individual and a call to action.
- Bortz spoke about his concerns with the
way the transition to fee-based accounts would occur and that the DOL
should give firms some sort of roadmap on how this transition would
Hadley primarily spoke about
his organization's concern with the regulation's potential impact on advice
with annuities. He said lacking the
ability to tell an investor what is in the plan or educate them on specific
issues would hurt overall investor education. He also stated that the education exemption
should cover incidental advice as not being fiduciary. Additionally, he argued that the exemption
should consist of rules in PTE 84-24. Hadley stated
the annuity industry would need at least three years to comply with
the new regulations.
Murphy focused on the impact
that the new fiduciary standard would have on his organization. He stated that the new standard could harm the
level of advice that his investors could get because they are primarily low to
middle income investors. Murphy
concluded by stating that the education portion of the rule should be
changed so that fiduciary advice is individual and a call to action.
Bortz focused on the fact that
the DOL and his organization agree on the merits of the proposal, but that his
organization had concerns with the way the transition to fee-based accounts
would occur. He also stated that hold
recommendations should be grandfathered into the proposal. Bortz concluded by stating that when the UK
implemented a similar regulation, they gave businesses a lot of materials on
how the transition would work and suggested the DOL does the same.
Campbell asked Bortz if he
could describe wholesaling and how it would be affected by rule, as he
mentioned in his comment letter. Bortz
said that some of the wholesalers within an organization may be considered
fiduciaries even though they do not interact with clients, which is a big
Campbell asked Murphy why he
thinks advice should be individualized because that is not in the FINRA
definition that DOL used. Murphy said
that individualized advice should be the standard because the proposal is too
broad with its interpretation.
M. Seys, Vice President & Chief Counsel – Retail Retirement, Corporate
Compensation & Benefits, General Counsel’s Organization, Ameriprise
Puritz, Managing Director, Rebalance IRA
Kruszewski, Chairman and CEO, Stifel Financial Corp.
argued in favor of an adaptable “principles-based exemption,” in lieu of
the Best Interest Contract (BIC) exemption that required: 1) placing the
client’s interests ahead of the advisor’s; 2) charging reasonable fees;
and 3) Providing simple, clear, meaningful disclosure.
claimed that the existing marketplace is “categorically not working,” that
investors are generally unaware of fund-level fees, and that Rebalance
regularly brings in “Brokerage Refugees” as clients.
advocated for a uniform best interest standard developed in conjunction
with the SEC and FINRA, and stated that the proposed rule would be harmful
to investors, but beneficial to Stifel, as the proposal would force the
organization to move all their client accounts to fee-based accounts –
which average double the cost of brokerage accounts.
In her statement, Seys agreed
with the application of a best interest standard to retail accounts, but
claimed that the BIC exemption was “not the right vehicle.” Specifically,
she called for a principles-based approach that required advisors to place the
client’s interests ahead of their own, charge investors reasonable fees and
provide simple, clear and meaningful disclosure. She argued that
unprecedented warranties and penalties for harmless errors were unwarranted,
and highlighted the fact that covered accounts would be subject to both private
rights of action and excise taxes, while non-covered accounts would only be
subject to one.
Puritz discussed his
organization’s philosophy and business model at length, and called for the
regulators to ensure an “even playing field” for all types of accounts.
He contested that most brokerage accounts charge an average of 2-3% in fees
(taking all fees into account), while his organization only charged 0.7% –
proving that the fee-based model was viable for smaller investors. He
also stated that it was “ok” if a new regulation did not allow existing
business models to serve “modest savers.”
Kruszewski stated that the BIC
exemption was so complicated and costly that it could eliminate the
commission-based brokerage model. He further argued that such an
occurrence would be damaging to investors, as brokerage accounts charge an
average of 50% less compared to advisory accounts within his
organization. Further, he stated that there was no evidence that
commission-based account were outperformed by fee-based accounts.
Kruszewski then advocated for a uniform best interest standard that would
apply to all accounts and avoid investor confusion. Finally, Kruszewski
stated that the goal must be to encourage as many people to save as much as
possible, and that raising fees and limiting choice was not the best way to do
Hauser asked Kruszewski if,
regardless of the BIC exemption, a framework of the following principles was
workable: 1) an upfront commitment (possibly at the transfer of funds if the
commitment was retroactive) to act in the investor’s best interests; 2) a
commitment to reasonable fees based on the services provide; and 3) make the
commitment that is binding and enforceable.
After an ensuing discussion
between Kruszewski and Hauser, Kruszewski stated that such an a framework may
be workable, but that it would have to rely on an objective definition of
reasonable and that he would have to see specific text and requested the DOL to
provide a second comment period on a revised rule. During the discussion,
Kruszewski noted that such a proposal would likely fit “on three pages” – in
contrast to the current proposal.
Mares inquired into Puritz’s
claim that his organization used “endowment style” financial planning, and
specifically whether they relied on high volumes of illiquid assets – as most
endowments do. Puritz replied that there is a debate among endowment
advisors concerning the efficacy of illiquid assets, and stated that he simply
meant that technology now allowed his organization to utilize modern portfolio
management techniques (such as asset class diversification and regular
rebalancing) for smaller investors.
Piacentini asked the panelists
about the NERA report, as well as their own statistical estimates, and what
they took into account in the calculation of their numbers, and whether or not
they believed averages were an accurate statistic to use in this method.
Kruszewski stated that he believed that averages were the best statistic to
examine for this conversation, and that when he spoke of returns he was
speaking holistically of all returns, and when he spoke of fees he was referring
to Stifel-charged fees. Puritz stated that his fee numbers of 2-3% and
0.7% where holistic numbers, and evidence that the current marketplace was not
A discussion ensued among the
panelists on whether existing law offered a level playing field. Kruszewski
noted that Puritz’s organization offered a narrow product range, while Puritz
argued that Kruszewski’s organization was not held to the same standards.
Seys countered that, given the jurisdiction of state enforcement actions, the
playing field may actually be tilted in Puritz’s favor.
Canary then asked Kruszewski
to clarify his statements regarding investor confusion, and asked how, if one
client currently has five different accounts with an organization – and each of
those accounts carry different broker obligations under the law – will the DOL
rule make the situation more confusing. Kruszewski responded that there
are essentially two sets of rules: 34 Act rules and 40 Act rules. He
stated that these sets of obligations currently act harmoniously, but that the
DOL proposal would create a third set of hybrid rules, which would place
certain 34 Act accounts under some 40 Act obligations.
Canary closed by asking for
opinions on the seller’s exemption. Seys stated that she agreed with
previous panelists that the proposal was overbroad, and called for the proposal
of a viable, bright line exemption.
Dudley, Senior Vice President of Global Retirement and Compensation
Policy, American Benefits Council
Jones, Executive Vice President and Chief Investment Officer, Financial
Tarbell, ASA, American Society of Appraisers
said the new definition of fiduciary is at odds with employers, who claim
that the new definition would make tools to help investors, such as
education, more difficult to utilize. She offered several solutions,
including clarifying the “casual conversation” exemption, as well as
broadening the education provision and extending the transition
explained that his company has been acting under the fiduciary standard,
and that the DOL taking these measures is extremely beneficial, particularly
to investors. He offered four main points: 1) individuals need
unconflicted advice; 2) the rule is workable; 3) there is technology that
can be used to educate; and 4) he offered areas where he felt the rule
could be strengthened.
thanked the DOL for making certain changes to the 2010 proposal, but added
that he was still concerned about certain aspects. His concerns
included the fact that appraisers evaluating prices in certain scenarios
are still considered fiduciaries under the current proposal. He
supported his argument by claiming his fears are widespread, and also by
arguing that appraisers only declare a price, and do not make
recommendations on actions.
Dudley began her testimony by applauding the DOL’s
efforts, as well as their ability to listen and consider each panelist’s
comments. After hearing from a number of
plan sponsors, the overarching response was that the new rule would make it
difficult to provide tools for investors, such as education, which would become
more expensive to administer. Instead,
they would be forced to utilize generic information, which Dudley deemed as
insufficient for the real questions people have. An example she provided included the usage of
call centers, which under the new rule could be considered a fiduciary.
Further, she discussed a scenario where a human resources
employee could be considered a fiduciary for giving a co-worker “advice” on
what plan to select. At the end of her
testimony, Dudley offered several solutions to the problems she addressed. First, she suggested clarifying the “casual
conversation” exemption, as well as including a “mutual understanding”
provision. She continued to explain other
solutions, such as broadening the education carve out and extending the
transition period beyond eight months to allow companies time to comply.
Jones initially spent time discussing how Financial
Engines has been operating under the fiduciary standard for years, and that the
DOL’s efforts to make this rule will benefit those receiving the benefits. He made four main points throughout his
testimony, arguing that: 1) individuals need unconflicted advice; 2) the rule
is workable; 3) technology is available to get simple advice, regardless of
wealth; and 4) he also offered areas where the rule could be strengthened.
Jones made the initial point that the status quo is
no longer good enough, and that most advisors act in their own best interest,
including the incorporation of high fees on their investments. Next, he argued that the new rule is workable
for providers, and especially beneficial for investors, which he supported with
his experiences at Financial Engines. He
then discussed the numerous resources found in technology available for those
who have questions, regardless of wealth.
Lastly, he suggested strengthening the education provision, which he
feels may restrict advisors from being able to communicate information about
their services effectively, as well as other provisions.
Tarbell discussed his concern with appraisers being
included under the fiduciary definition, although he appreciated the changes
made from the 2010 proposal. He opposed
“the carve-out of the carve-out,” referring to the education exemption. Further, he explained that he opposed efforts
by the DOL to treat appraisers as fiduciaries when performing employee stock
ownership plan (ESOP) related valuations.
Also, he raised concerns that the DOL came out with two separate
policies regarding appraisers.
Tarbell then explained that the concerns he is
expressing are widespread throughout the industry. He argued that appraisers are not
recommending or advising anyone, but rather issuing a value of what something
costs – not whether to invest. He stated
that if appraisers are included in the definition of fiduciary, it could give
rise to disputes which would require litigation. He also claimed that there is no evidence to
support the idea that including appraisers as fiduciaries will effectively
solve any problems. He does, however, support
the idea of creating a separate regulation solely concerning appraisers, and
would be willing to discuss in detail the steps in that process.
Hauser clarified that casual
conversations are not covered, and that there must be a recommendation or a
call to action. Dudley responded by requesting that this be clearly
written in the rule. Hauser then asked how to do that, and Dudley agreed
to send over some examples.
Mares asked what possible
procedures exist to narrow down the options and considerations on the list of
retirement plans without crossing the line, with Dudley’s response including
the need for guidance on what to do while offering their services.
Hauser asked Dudley if there
was an objection to widening the definition of education. Dudley said
there was no objection to widening it, but requested there be specific examples
illustrated in the rule.
Hauser asked why mutual
consideration is needed to initiate the fiduciary standard and what would be
considered “mutual consideration.” Dudley responded by claiming that both
parties need to understand that the conversation taking place is about their
plans, assets, etc., and that there has to be a clear understanding that there
is an individualized recommendation.
Hauser and Tarbell went
through a discussion regarding the need to change the status quo when it comes
to appraisers and the fiduciary standard, which resulted in them agreeing to
disagree. Hauser mentioned there might be a separate piece of regulation
specifically for appraisers, on which the ASA would be welcome to assist.
Grady, Legislative and Regulatory Committee Chair, Alternative &
Direct Investment Securities Association; Chief Strategy and Risk Officer,
Goldberg, Chairman Emeritus, Investment Program Association; Chairman,
Carey Financial, LLC
Kaswell, Executive Vice President and Managing Director, Managed Funds
expressed concern that the DOL proposal is based on the concept of
conflicted advice, saying that emphasizing compensation and conflict tends
to minimize other positive aspects of advisor relationships and ignores
regulation from FINRA and the SEC.
was critical of the BIC exemption, saying that it deviates from a
principles-based approach by using a legal list of assets that fit under
the definition of “common investments.” He said the term common is too vague, and
that the use of lists could stifle innovation because new products cannot
be considered common.
Kaswell warned that the proposal, absent
changes, could impair the ability of sophisticated plan investors to invest in
hedge funds. He stressed that securities
laws already protect and would continue to protect plan investors from
inaccurate or misleading information.
Grady expressed concern that the DOL proposal
is based on the concept of conflicted advice, saying that emphasizing
compensation and conflict tends to minimize other positive aspects of advisor
relationships and ignores regulation from FINRA and the SEC. On the BIC exemption, Grady said it would
create a problem of differential treatment of retirement accounts from other
types of accounts.
Goldberg was critical of the BIC exemption,
saying that it deviates from a principles-based approach by using a legal list
of assets that fit under the definition of “common investments.” He said the term common is too vague, and that
the use of lists could stifle innovation because new products cannot be
considered common. Further, he said if
the DOL does choose to keep the legal list, it must be as inclusive as possible
and include REITs and BDCs, which benefit investors by providing more choice
Kaswell warned that the proposal, absent
changes, could impair the ability of sophisticated plan investors to invest in
hedge funds. He recommended that the DOL
revise its proposal to permit fund managers to communicate directly with plan
investors and to respond to questions without being considered fiduciaries. He stressed that securities laws already
protect and would continue to protect plan investors from inaccurate or misleading
Mares asked Goldberg to explain the structure
of a typical non-traded REIT and how investors get visibility into its assets. Goldberg explained that REITS are
publically-registered vehicles that conform to regulations from the SEC, FINRA,
and state laws, so they provide very robust disclosures similar to any other
Mares asked what conditions should be
considered for including REITs in a portfolio. Goldberg noted that concentration limits generally
limit REITs to well under ten percent of a portfolio.
Canary asked about the applicability of the
seller’s exemption to hedge funds. Kaswell
stressed that hedge funds should not be considered fiduciaries and explained
that advisors and investors make their decisions based on their own
Canary asked what types of investors can invest
in hedge funds. Kaswell stated that
individual investors, even within a plan, have to meet thresholds to invest in
hedge funds. He explained that investor protections are in place, so that only
sophisticated investors as judged by the SEC can invest, and that these
standards screen out the average retail investor.
- Scott Robinson, President-Elect, Appraisal
- Michael Nicholas, CEO, Bond Dealers of
- Mike Gerber, EVP, Franklin Square Capital
- Robinson focused on the way the proposed
rule would affect the appraisal industry. He argued that the regulation
would make appraisal firms that buy/sell fiduciaries.
- Nicholas argued that the proposal would
harm investor access to plans and advice and the DOL should conduct the
new regulation through a "harmonized approach with different
- Gerber's main point was that the DOL
should include traded and non-traded BDC's on the list of exemptions.
Robinson focused on the way
the proposed rule would affect the appraisal industry. He argued that the regulation will make
appraisal firms that buy/sell as fiduciary. He said that the appraisers could not have a
conflict of interest, and this regulation would unfairly impact appraisers. Robinson continued that the appraisal industry
is already the most highly regulated industry and there is no need for more
regulations to protect investors. In conclusion,
Robinson asked that the department provide clear definitions and provide
exemption for appraisals for specific transactions.
Nicholas argued that the
proposal would harm investor access to plans and advice and the DOL should
conduct the new regulation through a "harmonized approach with different
agencies." Additionally, he stated
that the principal trading restriction should be taken out because it hurts
Gerber's main point was that
the DOL should include traded and non-traded BDC's on the list of exemptions. He argued that these investments are some of
the most highly regulated and transparent investments that someone could chose.
Gerber also stated that these types of
investments meat the DOL's requirements in the preamble of the regulation
Campagna asked Robinson about
the difference between a fairness opinion and an appraisal. Robinson stated that the fairness opinion
takes into account more than market value.
Cosby asked Robinson about how
the proposal would increase costs for investors through the increased
regulation on appraisals. Robinson
stated that they would have to charge more because there's an increased
liability on the appraiser.
Cosby asked Gerber what his
firm's best practices are. Gerber stated
that they use third party valuation, mark every investment every quarter, and
do not over-distribute investments. Cosby
stated he asked this because it helps them in final rule with disclosure
Katz, Chief Executive Officer, International Securities Exchange, U.S.
Securities Market Coalition
Byrd-Hill, Chief Executive Officer, Weyn LLC
Trone, Founder and Chief Executive Officer, 3et
noted that it is important for brokerage companies to teach investors how
to use options without being deemed a fiduciary and said that determining
the qualification level of an options investor should not cause a broker
to become a fiduciary.
suggested that the DOL create a category of “financial wellness advisors”
who would not operate on commissions or a yearly fee. She suggested that the DOL expand the
educational options in its proposal to include new types of education and
financial wellness advisors.
suggested that the DOL set forth a checklist to outline practices that a
fiduciary must demonstrate to be complia
Katz noted that listed options
are not included as an asset in the BIC exemption and suggested that they
should be included, explaining that 165 million options contracts are traded in
IRAs. He said options require a level of
education and that it is important for brokerage companies to teach investors
how to use these products without being deemed a fiduciary. He also said that determining the
qualification level of an options investor should not cause a broker to become
Hill said the focus should be
on what happens to Main Street customers, saying that the advice given to less
educated investors is not good. She
suggested that the DOL create a category of “financial wellness advisors” who
would not operate on commissions or a yearly fee and that this model could
promote education through effective mechanisms like video game learning. Hill suggested that the DOL expand educational
options in its proposal to include new types of education and financial
Trone expressed concern that
the DOL’s proposal creates punitive rules that will make it easier for
dishonest advisors to “hide behind the complexity” of the rules and make it
harder for honest advisors to provide services. He said some important practices that the DOL
should focus on include: controlling for fees and expenses; defining due
diligence for investment options; and providing plan sponsors with performance
reports. Trone added that the DOL needs
to clarify if it is proposing additional practices for the industry to follow
or if a fiduciary only has to demonstrate compliance. He suggested that the DOL set a checklist to
outline practices that a fiduciary must demonstrate to be compliant.
Mares asked about the
differences in qualification levels for options investing. Katz said that limitations on investment
strategies are done at the firm level and that increases in qualification
represent greater experience and knowledge of the investor. He also noted that education and qualification
are independent as qualification is not given until an account is opened.
Lloyd asked if customers need
a margin account to trade options, to which Katz said margin account
requirements vary by firm. Lloyd then
asked if brokers provide advice in self-directed accounts. Katz said there is a clearly defined process
to determine if a broker is a fiduciary or not, noting that education without a
recommendation should not qualify an advisor as a fiduciary
Campagna asked if education is
done one-on-one with a broker. Katz said
education methods vary, explaining it can be done online and that there is “no
one formula” to educate a customer
Cosby asked if the
compensation model for options is the same as the broker model. Katz said that the compensation model for
listed options is the same as that for stocks. Cosby then asked if the education concept in
the proposal is sufficient for the financial wellness advisor concept. Hill said it is not sufficient because it is
too narrow and required information cannot be fully explained in one or two