Nobody has had time to fully grasp the Department of Labor’s new 1,000-plus page conflict-of-interest rule that will reshape the retirement planning industry, but both sides are preparing for a new effort to try to stop it from taking effect.
Announced Wednesday morning, the long-anticipated final rule is meant to crack down on financial advisers “bilking” their clients, in the words of President Obama, by steering them into high-fee investment products for which they receive compensation.
The Obama administration and congressional liberals believe that such conflicts of interest cost savers $17 billion annually, according to a figure calculated by Obama’s economic advisers that has become a source of controversy.
If the rule takes effect as scheduled in April of next year, all advisers, brokers and insurers working with clients planning for retirement will be legally required to put their clients’ interests first, a standard that is not required of many in the industry.
The industry objection, however, is that the specific provisions of the rule, including the requirement that brokers who work on commission sign a specific contract with their clients spelling out their responsibilities to them, would be too costly. The result, they and congressional Republicans argued, would be that many low-income individuals or small businesses would lose access to financial advice altogether.
In the final rule, the administration announced that it had streamlined the contract and scaled back some of its most onerous requirements from the version it proposed last year.
Industry sources and advocates of the fiduciary standard at the end of the week were still reviewing the fine details of the rule and determining whether the changes made could mollify the financial services industry’s concerns — or, on the other hand, if it had been so watered down that the reformers who have advocated it for years were let down.
But the early feedback is that the final rule is a major victory for proponents of the fiduciary standard and a loss for the industry.
“We’re ecstatic about the rules,” said Micah Hauptman, a counsel at the Consumer Federation of America, a nonprofit group that backs the fiduciary standard.
Hauptman said the changes that were made to the law responded to the legitimate concerns of businesses that would be affected by it, without subverting the intent of the measure. The changes to the best interest contract requirement in particular, he said, were “reasonable.”
One industry source, who asked not to be named because they had not concluded reviewing the rule, said that despite the Labor Department’s efforts to make the new rule seem “very nice and rosy,” it still “creates a lot of problems” for businesses to continue providing advice to small businesses or less wealthy savers.
Rep. Peter Roskam, R-Ill., however, who has advanced legislation to pre-empt and replace the rule, didn’t need to review the rule beyond seeing it still had the best interest contract provision to determine that it was worth fighting.
Forcing brokers to sign a contract with their clients to establish the fiduciary relationship is a “very awkward way” of ensuring that advisers work in savers’ best interest, Roskam said. Telling a moderate-income client that he or she has to sign a document he might not understand before giving any advice is “counterintuitive and it’s off-putting,” he said.
Roskam said that the answer was his legislation, the SAVERS Act, which has been advanced out of the House Ways and Means Committee on which he sits. The SAVERS Act would effectively block the rule from going into effect and substitute a different best interest standard for advisers, one that doesn’t require the contract. Advocates of the Labor Department rule have argued that brokers could easily evade the fiduciary requirement established by the SAVERS Act with only a small disclosure.
The SAVERS Act faces slim odds given that it would threaten a major priority of President Obama, who would veto it. The only chance it could pass during Obama’s tenure would be with the help of many Democrats or attached to must-pass legislation such as a government funding bill. It was co-sponsored by six Democrats, none of whom responded to requests about whether they would seek to advance it.
On a call with reporters earlier in the week, Labor Secretary Tom Perez seemed to acknowledge the threat posed to the rule of riders attached to must-pass government spending bills. The rule only survived last year’s government funding fight, he said, because of “a steadfast cohort of Democratic allies in Congress.”
A more likely scenario, however, is that industry opponents might challenge the rule in courts. On Thursday the U.S. Chamber of Commerce raised that possibility, as has at least one other group representing an affected industry.
Perez said Wednesday that he thought the rule would survive any challenge. “I’m confident in what we’ve done on the policy front, and I’m confident that we will survive any legal challenge,” he said Wednesday at the event rolling out the rule, according to the publication ThinkAdvisor.
The threat of a legal challenge was the reason that the department carried out such a deliberative process, which included four days of public hearings in August.
