Long ago, in distant elementary and junior high
school days, some of the most galvanizing words on the playground or in the
neighborhood were heard in the battle cry “Fight…fight..” Brawls
major or minor have always had the power to stir the blood and draw a crowd. Back then, the motivation was likely to be nothing
more serious than someone’s wounded pride, pecking order conflicts, or the mistaken
belief that the opposite sex was impressed by such macho behavior.
Times change, and we hopefully outgrow the need for
those juvenile tests of strength and will. But that doesn’t mean that the
appetite for combativeness goes completely away. It’s a part of everyday
life, from the competitiveness of business to the sparring of politics and policy
making. We’ve been treated to a classic demonstration of this
combativeness in the aftermath of the Department of Labor’s April release of
proposed regulations on – how apropos – “conflicted investment advice,” much
better-known as fiduciary definition regulations.
The avowed intent of these regulations is to assure
that those saving for retirement receive investment advice that is in their
best interest, not advice biased in some manner that favors the advisor over
the saver. Proponents believe some
version of these regulations will do this.
Opponents believe the rules as proposed will result in such advisor
anxiety over possible fiduciary liability that smaller investors – particularly
IRA investors – will be left without the investment advice they need.
Most of the shots in the minor war that has ensued
have been fired from a distance, in newsletters, speeches, editorials and the
like. Some also in Congress, including
legislation to halt or defund the regulations, and lawmaker pleas to Secretary
of Labor Thomas Perez. A dramatic
exception, perhaps worthy of comparison to a Las Vegas fight card, occurred in
a hearing held June 17th by the Health, Education, Labor and
Pensions (HELP) subcommittee of the House Committee on Education and the
Workforce.
That hearing bore the unambiguous title “Restricting
Access to Financial Advice: Evaluating the Costs and Consequences for Working
Families and Retirees.” Unambiguous, in
that it clearly expressed the organizers’ judgment that unless the proposed
regulations are significantly modified, their effect will be to deny many
retirement savers the guidance they critically need to prepare for life after
their careers.
It might be overstatement to call the hearing and
the testimony of lead witness Perez and private sector witnesses a “pitched
battle.” But some who witnessed it have characterized
the testimony as intense and spirited. As
one put it, “Secretary Perez vigorously defended the proposal and the need for
its adoption.”
Secretary Perez repeated a previously-presented
example of a couple that invested IRA rollover assets in an annuity investment
whose fees he characterized as excessive.
He stressed that this was not illegal, because advisors in such
circumstances operate under an investment “suitability” standard, rather than a
best-interest fiduciary standard. This
the Secretary characterized as “flawed,” expressing his belief that the
compensation interests of the advisor are almost inevitably in conflict with
the best interests of the investor.
There seemed to be little disagreement on whether
the best interest of the retirement saver is the appropriate standard of
conduct for those who provide investment advice. But there was little agreement that the
regulatory formula proposed by the DOL can be successfully adapted to the
actual investment marketplace, particularly where IRAs are concerned.
While the proposed regulations allow variable forms
of advisor compensation, they do so at the price of a binding contractual
relationship – a “best interest contract” – between advisor and client. That contract was described by Secretary Perez
as necessary to enforce a best interest standard.
But a number of witnesses believe that the proposed
regulations are unclear in defining just when in the advisor-client
relationship this contract would be necessary, and fear that those who do not
want to become fiduciaries will stop short of giving savers even basic investment
education, to avoid being ensnared in a fiduciary net.
Secretary Perez expressed his belief that these
proposed regulations do a much better job than the long-since-withdrawn 2010
regulations in carving out and allowing advisors to provide investment
education without giving themselves fiduciary liability. But there was significant disagreement from
other witnesses, to which Secretary Perez sharply asked for “chapter and verse”
language on how they would improve it.
Witnesses also expressed the belief that the
best-interest contract, now commonly referred to as “BIC,” and the education-versus-advice
conundrum, together will lead to more litigation in the form of
breach-of-contract lawsuits. To which
the Secretary responded that binding arbitration language in the proposed
regulations was intended to resolve such conflicts. Many advisors, however, are unlikely to be
cheered by the prospect of arbitration any more than they would welcome litigation. Both have costs in time, expense, and
uncertain outcomes.
As summers always seem to do, this one is flying by.
The deadline for submitting written
comments on these proposed regulations, July 21st, is already upon
us. It’s now less than a month to the
public hearing scheduled for August 10th through 12th,
with an additional day in case it is needed.
Based on the combativeness we have seen so far, it would surprise no one
if this bout goes that extra round.
