DOL Chief Perez Prepared to Explain Final Fiduciary Rule

As you read this column, you're most likely also poring over the Department of Labor's rule to redefine the definition of fiduciary under ERISA. The Office of Management and Budget was expected to release the rule in final form by the end of March; Labor Secretary Thomas Perez told a House panel in mid-March that the rule's release was nigh.

[Editor's Note: The release date for the final rule has been pushed back from late March to an anticipated release of early April.]

I've been covering the complaints and concerns and twists and turns of this rulemaking for years, and I have to say, like you, I'll be relieved to see it in final form. (Granted, I'll be drawing on experts in the field like you to help me decipher it.)

But while Perez told members of the House Education and Workforce Committee in mid-March that DOL listened to the overwhelming number of concerns raised during the comment period, he said DOL would "continue to work" on the rule, which signals — to me at least — that there could be room for more revisions once the rule is released.

During the mid-March hearing held by the committee on DOL's policies and priorities, Rep. Phil Roe, R-Tenn., voiced his concern to Perez that there is "no indication that the final rule will be any different" from the one proposed in 2010.

But Perez noted the lengthy comment period the rule underwent, adding that the DOL heeded the concerns raised about designating employee stock ownership plans as fiduciaries, and removed ESOPs from the rule that's undergoing OMB review.

"We heard a lot of concerns about ESOPs and took them out" of the conflict of interest rule, Perez said. "Our North Star is an enforceable best interest standard," he added, stating that DOL "has read every one of" the 300,000 comments that came in on the proposed rule.

Responding to Congressional Concerns

Rep. Matt Salmon, R-Ariz., asked Perez for assurance that under DOL's fiduciary rule, "the law of unintended consequences" doesn't limit access to advice for low- and moderate-income savers.

"We have a shared interest to make sure everyone has access to retirement advice," Perez responded. "At the end of our process, we look forward to explaining the changes we made and how we intend to proceed."

Roe introduced the Affordable Retirement Advice Protection Act (H.R. 4293), which was approved by the education and workforce committee on Feb. 2 along with the Strengthening Access to Valuable Education and Retirement Support (SAVERS) Act (H.R. 4294), introduced by Rep. Peter Roskam, R-Ill. Both bills seek to replace DOL's conflict of interest rule.

Perez stated during his mid-March testimony that he believes the bills "move the status quo backward" in ensuring retirement savers receive unconflicted advice.

Rep. Mike Bishop, R-Mich., asked Perez to ensure the final rule would address concerns raised about the treatment of variable annuities and "keeping [them] under the 84-24 prohibited transaction exemption"; and permit commissions on sales of proprietary products and changes to the BIC exemption.

Perez responded that DOL has taken the comments on those issues "seriously," adding that "when we reach the end of the process we will explain the proposal, the changes we made and why we did what we did."

Lessons From the U.K.?

Roe also noted results of a United Kingdom government study, released in mid-March, that found an investment advice gap for low- and middle-income individuals was created following the 2013 adoption of a rule directly banning third-party payments to advisors in connection with investment advice.

"DOL's proposed fiduciary definition rule would have the exact same effect of banning third-party payments to advisors," said Kent Mason, a partner with Davis & Harman, a Washington-based law firm that represents big financial companies. "The reason that this is true is that the only way for an advisor to accept such payments is to use the proposed best interest contract exemption, which to my knowledge no financial institution can or will use."

The U.K. rule, Mason said, triggered a "massive exodus of advisors from the small account market" in the U.K.

A survey of advice firms found that over the last two years, the proportion of firms that ask for a minimum portfolio of more than £100,000 (approximately $142,000) has more than doubled, from around 13% in 2013 to 32% in 2015.

"In other words, since the new regulation took effect in 2013, minimum asset thresholds for advice have soared, just as predicted by the industry in the U.K. and by the industry here" in the U.S., Mason said.

Mason also noted that the U.K. regulator's own survey revealed that "45% of firms very rarely advise customers on retirement income options if those customers have small funds (i.e., less than £30,000 to invest)," or about $42,000.

When queried on that U.K. study at a Senate Appropriations hearing a day after the House Education and Workforce hearing, Perez stated that the U.K. "banned commissions and required a new license" under its regulation. To get to the bottom of what was happening in the U.K., Perez told Senate Appropriations Committee members that he "went to the U.K. and met with the regulators."

They told him that after the U.K.'s Financial Services Authority implemented the rule, there was "a movement of funds away from complex instruments into more index funds," which Perez characterized as positive, as most U.S. investors "don't need a complex instrument like a variable annuity; [they need] simple, low-cost funds."

Barbara Roper, director of investor protection for the Consumer Federation of America, argued in a separate interview that "the two rules are very different."

Said Roper: "Not only did the U.K. rule ban commissions outright, but it also increased education and credentialing requirements (forcing some advisors to go back to school), imposed new levies for a Financial Services Compensation Scheme and imposed new liability retroactively. There's nothing comparable to any of these provisions in the DOL rule."

In fact, Roper said, "the DOL consciously took a very different approach when it provided a way for firms to receive commissions and other forms of variable compensation and still comply with the rule."

One area of the DOL's rule that will likely be changed — in some way — is the much maligned best interest contract exemption, or BICE, which would require the advisor to have a client sign a contract before rendering advice.

Roper argued that industry lobbyists' claim that the BICE is unworkable and will cost investors access to advice is full of holes. First, she said, "the service they call 'advice' — suitable recommendations from a salesperson who is free to place his own financial interests ahead of the interests of the customer — is advice in name only. It is a scandal that regulators have allowed investment salespeople to get away with."

The DOL rule, Roper continued, "would finally force them to act like the advisors they claim to be — at least when they are giving advice about retirement assets." Investors who prefer to pay for advice through commissions would get "access to real advice."

Second, the claim that "no firms can or will rely on the BICE is an empty rhetorical flourish from financial firms intent on maintaining the status quo,"Roper said. Firms "are already preparing to comply with the BICE, while others are waiting for the final rule before proceeding. Since DOL officials have indicated they plan to make changes to the rule to make it easier to implement, there is every reason to believe that firms that wish to retain their ability to conduct rollovers will make the decision to come into compliance."

— Read "5 Questions Every Firm Should Ask About DOL Fiduciary Rule" on ThinkAdvisor.