DOL fiduciary proposal gets bipartisan pounding

Republicans and Democrats asserted at a congressional hearing today that a proposed Labor Department rule that would expand the definition of fiduciary for retirement plans could deny small investors access to the advice market. Lawmakers from both sides of the aisle expressed doubts about whether the agency had done appropriate cost benefit analysis before proposing a regulation last October that would extend the fiduciary duty to anyone making recommendations about purchasing or managing securities for a retirement plan. The proposed rule would replace a complicated five-part test currently in place that critics say makes investors vulnerable to conflicted advice or that which is not in their best interests. A three-hour hearing of the House Education and Workforce Subcommittee on Health, Employment, Labor & Pensions, featured Assistant Labor Secretary Phyllis Borzi, head of the Employee Benefits Security Administration. Ms. Borzi was grilled about whether her agency had taken into account the impact of the rule on broker-dealers and their ability to serve the IRA market. "The current proposal is an ill-conceived expansion of the fiduciary standard," said Rep. Phil Roe, R-Tenn., chairman of the subcommittee. "It will undermine efforts by employers and service providers to educate workers on the importance of responsible retirement planning. Regrettably, the proposal may deny investment opportunities and drive up costs for the individuals it is intended to protect." Rep. Carolyn McCarthy, D-N.Y., who stated that her Republican colleagues attack nearly every Obama administration regulation, agrees with them on the Labor fiduciary duty rule. “In this case, I still cannot defend the rulemaking process,” she said. “It … has the potential to hurt the economy.” Rep. Rush Holt, D-N.J., said that he hadn't seen any data to support the need for the rule. “We shouldn't make policy on what we imagine to be the problem,” he said. “Absence of evidence may be a problem in and of itself.” Ms. Borzi reassured the legislators that the Labor Department would produce a robust economic analysis by the time that a final rule is proposed, which is projected to happen by the end of the year. “We are looking to have the most solid cost information we can to justify the rule,” Ms. Borzi said. “We are in the process of a doing a much more thorough economic analysis.” Ms. Borzi stressed that strengthening investor protection under retirement law is the overriding objective. “This is all about accountability, transparency and eliminating conflicts of interest,” she said. The Securities Industry and Financial Markets Association, however, argued that the proposed rule is so far off-track — and so likely to undermine the ability of broker-dealers to help customers with retirement plans — that it should be scrapped. “The breadth and complexity in the provisions, the many significant changes that need to be made, and the uncertainty regarding the exemptions that will be required based on the final language, underscore the need for the department to go back the drawing board,” Kenneth Bentsen Jr., SIFMA executive vice president, said in prepared testimony. “In addition, the proposed rule lacks sufficient cost benefit analysis, and absolutely no cost benefit analysis related to its impact on IRA owners.” Mr. Bentsen said that the fiduciary rule would force brokers to migrate to fee-based advisory accounts that would hurt IRA participants. “We believe the individual investors who hold them will suffer increased costs, significantly fewer choices and greatly restricted access to products and services,” Mr. Bentsen said. Ms. Borzi countered such criticism by noting that Labor's fiduciary proposal allows brokers to earn commissions on securities, mutual funds, insurance products and annuities and act as a seller without becoming a fiduciary. What it prohibits is providing guidance that enriches the adviser at the expense of workers and retirees, she said. The agency will continue to push toward a final rule by the end of the year, according to Ms. Borzi. She stressed that it has been painstakingly gathering input from the industry and other groups for months. “It is already a slow, deliberative process,” Mr. Borzi said in an interview following her appearance. “Did I hear anything I didn't hear before today? I don't think I have. But I certainly take seriously all the questions the members asked.” She said that the agency was not bound to a schedule of promulgating a final rule this year but that is the desired timeframe. “We'll continue to move forward. That's our goal,” Ms. Borzi said. “It's much more important that we get it right. We'll see what happens.” She dismissed the idea of the Labor Department's holding off on its fiduciary rule until the Securities and Exchange Commission proposes a universal fiduciary standard of care for retail investment advice, a move it says it will make this fall. Ms. Borzi said that the agencies are coordinating their efforts and that the final rules will not conflict because they're addressing two different laws. “The people who want us to wait are people who want us to defer to the SEC, and we're not doing that,” Ms. Borzi said.