On February 23, 2015, the White House announced that President Obama has directed the Department of Labor (DOL) to move forward with proposed rulemaking to require advisers, including broker-dealers, that provide advice regarding retirement plans that are subject to the Employee Retirement Income Security Act (ERISA), including Individual Retirement Accounts (IRAs), to observe a fiduciary standard in rendering advice.
Drawing a comparison to mortgage abuses during the financial crisis leading to the establishment of the Consumer Financial Protection Bureau and new rules for mortgage lenders, the White House’s Fact Sheet states that:
- “Backdoor Payments & Hidden Fees Are Hurting the Middle Class” – According to the Council of Economic Advisers (CEA), these conflicts of interest are likely to lead, on average to 1% lower annual returns and annual losses of US$17 billion.
- “A Wide Array of Research Shows Why Conflicts Hurt Working and Middle Class Families”, citing as examples advisers who steer clients into unnecessarily higher cost product offerings.
- “President Obama is Cracking Down on Conflicts of Interest”.
- “Proposed Rule Coming Soon” – The DOL will issue a notice of proposed rule-making in the coming months and will seek extensive public feedback.
The White House indicates that the existing rules have not kept up with the major shift from traditional corporate pension funds to self-directed plans where advice is provided by brokers who are not required to give “unbiased advice”.
The Fact Sheet states that the CEA has found, in addition to the losses noted above:
- US$1.7 trillion in assets invested in products subject to conflicted advice, involving an annual cost of US$17 billion.
- “A typical worker who receives conflicted advice when rolling over a 401 (k) plan to an IRA at age 45 will lose an estimated 17 percent from her account by age 65.”
- “A retiree who receives conflicted advice on how to invest his IRA at retirement will lose an estimated 12 percent of the value of his savings if drawn down over 30 years compared to a retiree who receives unconflicted advice.”
The proposed rules will update the definition of “retirement investment advice” under ERISA to uniformly capture advice obtained in connection with IRAs and 401 (k) plans. Compensation arrangements will be subject to a principles-based exemption that will continue to permit varying models, including commission-based compensation, while mitigating conflicts of interest. General retirement investing education provided by investment firms will not trigger fiduciary duties.
Section 913 of Dodd-Frank requires the Securities and Exchange Commission (SEC) to consider the adequacy of the present standard of care SEC registrants are required to follow when providing personalized investment advice and recommendations about securities to retail customers. For broker-dealers, the backbone of this standard of care is a suitability requirement in respect of recommendations. Registered investment advisers are subject to a fiduciary obligation to act in a client’s best interest.
The SEC has conducted a study of the issues required to be considered by Section 913, but has not yet reached conclusions or proposed new rules.
The White House’s action today, and the proposed DOL rulemaking, will result in additional pressures on the SEC to move forward with proposed rules that further address broker-dealer conflicts of interest and reach a definitive conclusion on whether to adopt a uniform fiduciary standard. Enforcement efforts in this area, already an SEC priority, are also likely to become more intensive.