The Labor Department this week released guidance for advisers who appeared to take a tough stance on conflict of interest by interpreting the Trump-era exemption for trustees operating in the retirement space.
Tuesday’s announcement from the department drew praise from some investor advocates, who hope the Labor Department and the SEC will work to tighten standards for advisers and crack down on conflicting advice. While proponents of stricter advisory standards opposed the rules produced by the DoL and the SEC under the previous administration, clarifying guidance to strengthen those provisions might be a faster way to improve investor protection than to improve investor protection. re-launch a long and politically controversial rulemaking process to draft new regulations or modify old ones, lawyers say.
One of the two documents The DoL released this week is billed as a guide for retirement investors in choosing an advisor, offering a series of questions to ask potential advisors about their fiduciary obligations, the fees they charge and how they manage conflicts of interest.
The other document is a series of frequently asked questions to comply with the prohibited transaction exemption. It is the waiver that set the rules for advisers to receive payments for the conflicting retirement advice they offer as trustees under the Employees Retirement Income Security Act. This rule was adopted by the DoL in December 2020 and came into effect in February.
“The Guide for Retirement Investors provides useful information regarding the importance of selecting an investment advice provider who is a trustee and the protections that are provided to retirement investors under the exemption,” Ali Khawar, Assistant Secretary of Temporary Work for Security Benefits. , said in a statement. “The compliance-focused FAQs help financial institutions and investment professionals comply with the exemption. “
The multi-year battle over ERISA fiduciary standards has been controversial, with industry groups leading an ultimately successful legal campaign to defeat an Obama-era rule. In the dying days of the Trump administration, the Labor Department passed a replacement that investor advocates like Barbara Roper opposed, saying it did not adopt specific and meaningful protections, and that it s instead, was aligned with the SEC’s advisory standard for brokers, another framework opposed by Roper and other attorneys.
Roper, director of investor protection at the Consumer Federation of America, said the original DoL rule appeared to “look to Reg BI’s low, undefined, non-fiduciary best interests standard to meet the high fiduciary standard. of ERISA “.
“It is, however, important to note that the DOL has retained its authority to interpret and apply the standard,” Roper said in an email. “These DOL guidelines show how important these standards can be in the hands of a regulator who intends to curb abusive industry behavior.”
In particular, she praised the DoL’s advice on mitigating conflicts of interest and its comments on payment schedules. In the documents, the department acknowledges that disputes involving compensation are inevitable, but also calls on companies to ensure that advisers’ incentives are aligned with those of their clients as much as possible.
“As we’ve said time and time again, limiting harmful incentives is the key to solving this problem, and the DoL has taken this one out of the park,” Roper said.
In addressing conflict, the DoL guidelines look at the issue from both the perspective of the individual adviser and at the company level, saying that the requirement to mitigate conflict “extends to the company’s own interests. financial institution, including interests in proprietary products and limited menus of investment options that generate payments to third parties.
Knut Rostad, president of the Institute for the Fiduciary Standard, describes the introduction to the question on mitigating conflicts of interest that could misalign an adviser’s incentive with his clients as “excellent”. sees this as support for its long-held claim that the current business model of the brokerage industry is fundamentally incompatible with strong fiduciary principles.
“This recognizes the great challenge of embedding fiduciary conduct into a broker-dealer model designed and built to distribute products,” Rostad wrote in an email.
Roper and Rostad hope Tuesday’s DoL post will be a down payment on more future guidance from the department and the SEC that would strengthen the standards of counseling.
Not all advisors feel the same.
WealthWise Financial Services CEO Loreen Gilbert praises DoL’s PTE for its fiat retirement advice, but would like regulators to pause before adopting stricter interpretations of their existing rules.
“We hope there won’t be more guidance from the DoL and the SEC,” she said, warning of the risk of “additional confusion and bureaucracy created if the DOL and the SEC s ‘imply “.
“There continues to be a battle between the DOL and the SEC over who sets the rules,” she said.
Rostad, meanwhile, would like the DoL to provide some details to strengthen the conflict provisions in the prohibited transaction exemption for trustee pension boards.
“[T]to fulfill the fiduciary mission of the exemption, additional guidance with the concrete practices required is essential, ”says Rostad. “Anything less is doomed to fail.
As for the SEC’s Reg BI, he pleads for it to be renamed “New Suitability”, arguing that it is not a big departure from the old long-standing benchmark for broker behavior. . In the future, he hopes to see changes to the rule, which he says “cannot be corrected just from new guidelines and their application.”
Roper, meanwhile, is hoping the SEC will issue interpretive guidance to clarify how it will interpret and apply Reg BI’s central pillars regarding recommendations and conflict mitigation.
In a statement, the DoL positions the new guidelines as the first document in an ongoing review of “questions of fact, law and policy relating to the exemption, and more generally, its regulation of fiduciary investment advice,” suggesting that others will follow. .
Then on Wednesday morning, the Senate voted to confirm Gary Gensler as SEC chairman, giving the regulator a full panel of commissioners and urging the agency to follow DoL’s lead and start strengthening Reg BI.
“The advice is an important first step forward,” says Roper, “but there is still a lot of work to be done. “