Congress this week moved to advance legislation that would halt President Obama’s planned new rule to curtail conflicts of interest in retirement investing, highlighting opposition to the forthcoming regulation from both sides of the aisle and the threat that a Republican president would undo it.
Just weeks before the Department of Labor’s rule is expected to be finalized, a group of Republican senators on Thursday introduced legislation that would require congressional approval to impose the rule, effectively blocking it. It would institute a different version of of updated protection for savers. Earlier in the week, two House committees, including a handful of Democrats, voted to advance the legislation.
The Labor Department rule, requested by Obama early last year, would broaden the definition of investment advisers required to be fiduciaries to their clients — that is, to act in their best interests. Today, many advisers do not face that requirement. The White House estimates that savers lose $17 billion annually because advisers steer them into high-fee investment products to get compensation from the companies selling the financial products.
Republicans, however, have warned that the rule would raise potential litigation costs for many advisers, making it impossible for them to offer retirement advice to small businesses and lower-income individuals.
One of the rule’s provisions that the financial services industry is particularly worried about is a contract that would exempt advisers from certain liabilities if they committed to acting in their best interests and disclosed potential conflicts.
The concern is that advisers would have to get potential clients to sign the contract before engaging in any discussions at all, making it impractical to do business.
“We believe it is one of the biggest flaws in the DOL proposal,” said a spokesman for Rep. Peter Roskam, the House Republican co-author of the legislation.
Jill Hoffman, the vice president of government affairs for investment management at the Financial Services Roundtable, said the contract provision reflects a “fundamental lack of understanding” by the Labor Department of financial advisers and “how hard their job is.”
Roskam’s legislation would update the definition of a fiduciary to include a best interest requirement that includes what he called simpler and clearer disclosure, but wouldn’t require any contracts be signed at the start of the relationship.
Roskam’s legislation would update the definition of a fiduciary for the purposes of labor law and tax law, because many retirement accounts are tax-privileged. Separate legislation, authored by Rep. Ann Wagner, R-Mo., and passed by the House in October, would update it for the purposes of securities law.
Together, Hoffman said, the bills provide “a more holistic look at how to overhaul this completely.”
Obama has threatened to veto efforts to stop the rule, and its opponents realize they cannot stop it now. But moving legislation demonstrates that Republicans are united against it, and some Democrats are willing to vote to stop it if given the chance.
Proponents of the Labor Department’s rule, however, view the alternative standards proposed by Republicans as too weak, compared to the broader definition of fiduciary sought by the administration.
Kate McBride, chairwoman of the Committee for the Fiduciary Standard, said the Roskam legislation was meant “to kill the DOL’s fiduciary rulemaking and weaken already existing investor protections. That’s all they want to do.”
For the rule’s supporters, removing the contract provision from the rule would undermine the goals of instituting a universal fiduciary standard and higher standards of disclosure.
They acknowledge, however, that those requirements are going to make it tough for some existing advisers to survive. Scott Puritz, a member of the Save Our Retirement Coalition backed by AARP, unions and financial reform groups, said many existing companies “are either going to transform or wither. That’s fine. It’s really about what’s in the best interest of the consumer.”
