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Calls for DOL Proposal Do-Over

The DOL is facing continued scrutiny of its fiduciary rule proposal, and after receiving 825 individual comments and many more form letters, many are also calling for the department to go back to the drawing board. Among them is SEC Commissioner Dan Gallagher who complains in a letter that “the DOL rulemaking is a fait accompli and that the comment process is merely perfunctory.” Nevertheless, Gallagher argues that the DOL’s idea that commission-based fees are superior to fees based on assets under management is a “misguided notion” and that many broker-dealers will simply stop serving certain types of accounts rather than “navigate the labyrinth of prohibitions and exemptions.”

The letter also questions the DOL’s assertion that it worked closely with SEC staff on the proposal and notes that Gallagher is commenting on the collaboration “[f]rom a distance—a place where a presidentially-appointed SEC Commissioner should not be in this context.” He touts the SEC’s use of “tailored disclosure and market forces for eight decades to ensure that investors can make informed investment decisions” and derides what he calls the “nanny state” approach taken by the DOL proposal. He argues that the DOL should withdraw its proposal and actually work with the SEC to “focus on a disclosure regime that empowers investors and allows brokerage firms to continue to offer a menu of services to all types of investors, not just the affluent.”

Gallagher suggests that the SEC will be unable to “stave off the heavy hand of DOL” by pursuing its own uniform fiduciary duty rule because while the SEC is authorized to conduct a rulemaking in the area by Dodd-Frank, the law requires that the standard “shall be no less stringent than the standard applicable to investment advisers” and thus commission-based fees would be permitted. Additionally, he notes that the provision states that “any material conflicts of interest shall be disclosed and may be consented to by the customer.” These requirements are less stringent than the DOL proposal, and thus if “the Commission moves forward with a Section 913 rulemaking, the industry will most likely end up with two incredibly burdensome and redundant rules.”

Gallagher also did not miss the opportunity to take a swipe at the Commission’s rulemaking priorities, noting that “[p]erhaps if the Commission had not been so busy over the last five years rotely implementing nonsensical Dodd-Frank mandates such as the conflict mineral disclosure rule (which, it turns out, was proposed right about the same time as the 2010 DOL fiduciary proposal), the agency could have been focusing on key issues like broker fees.”

In a recent op-ed for the Wall Street Journal, Robert Litan and Hal Singer echo Gallagher’s concerns about the proposal’s effect on the availability of advice for investors with smaller account balances. They argue that commission-based compensation is actually the least costly method of receiving advice for these investors. Under the proposed rules, Litan and Singer predict that to continue receiving advice, investors will move to a wrap fee model which could cost an additional $7,000 per year for a $100,000 retirement savings account.

Investors who chose not to move to this model may look to “robo advisers.” However, Litan and Singer question how automated advice will fare in a market stress event where “brokers and advisers perform a vital service by keeping clients invested for the long-term, rather than trying to time the market.” The pair recently issued a report questioning the DOL’s cost-benefit analysis and estimating “that the cost of depriving clients of human advice during a future market correction (just one of the costs not considered by DOL) could be as much as $80 billion, or twice the claimed ten-year benefits that DOL claims for the rule.”

A recent letter from 21 members of Congress notes the “extensive and significant feedback and comment on the rule” and suggests that the DOL should digest the response and repropose the rule instead of issuing a final rule as the next step. The group believes that the strong public response renders “a strong possibility that a final rule may widely differ in its substance from the initial proposal or contain provisions that were not part of the proposed regulation.” The letter also concurs with Gallagher that the proposed rule as written may limit investment advice options for some investors and unnecessarily end existing relationships between investors and advisers.