We have reported previously on the Department of Labor’s (“DOL”) intention to establish a fiduciary standard for those offering investment advice concerning retirement accounts (see SAA 2015-12). After President Obama strongly endorsed the fiduciary standard for retirement accounts, the agency followed through with a proposed rule that would create a uniform “best interest of investors” standard for individuals providing retirement investment advice.
The proposed rule would expand the definition of “fiduciary,” as that statutory term is used in the Employee Retirement Income Security Act of 1974 (ERISA), and would have investors and those managing their retirement accounts enter into a contract establishing and defining the fiduciary relationship.
According to a DOL Press Release issued on April 14th, “The proposed ‘best interest contract exemption’ represents a new approach to exemptions that is broad, flexible, principles-based and can adapt to evolving business practices. It would be available to advisers who make investment recommendations to individual plan participants, IRA investors and small plans. It would require retirement investment advisers and their firms to formally acknowledge fiduciary status and enter into a contract with their customers in which they commit to fundamental standards of impartial conduct. These include giving advice that is in the customer's best interest and making truthful statements about investments and their compensation.”
Arbitration is OK
The proposed rule references arbitration just once, but it’s an important reference. Says the proposal: “Adopting the approach taken by FINRA, the contract could require the parties to arbitrate individual claims, but it could not limit the rights of the plan, participant, beneficiary, or IRA owner to bring or participate in a class action against the adviser or financial institution.”
Constituent Groups React along Party Lines
PIABA reacted immediately with a Press Release supporting the proposal. President Joseph C. Peiffer issued the following statement: “We see every day what happens when those in and near retirement lose vast sums of money as a result of conflicted advice. These are people who have played by the rules all their lives and put their trust in the advertising and other claims made by brokerage firms and individual financial professionals. Too many investors lose their hard-earned retirement savings because their brokers sell investment products that pay a large commission but are not in the best interests of their clients. This is a system that is broken and must be fixed.” Consumer Federation of America also weighed in with a statement from Director of Investor Protection Barbara Roper: “Release of this proposed rule for public comment is an essential step in the effort to ensure that the interests of retirement savers are protected. The U.S. Chamber of Commerce issued a Release criticizing the proposal, and urging a cautious, deliberate approach. “Rushing this rule through the OMB review process prevents a thorough analysis that takes into consideration all concerns that have been expressed,” said David Hirschmann, President and CEO of the Chamber's Center for Capital Markets Competitiveness. “For example, it risks potential conflicts with regulations under the Investment Advisor Act and the Securities and Exchange Act, while unnecessarily duplicating regulatory oversight for broker-dealers,” he added. Echoing those sentiments was SIFMA, which issued a statement from President and CEO Kenneth E. Bentsen, Jr: “This is a voluminous rule where the fine print matters. We want to ensure it protects investor choice and doesn't unnecessarily reduce access to education or raise costs, particularly for low and middle income savers. With so much at stake, we will thoroughly review the rule and its impact on investors, and express our views in the public comment period.”
(ed: *Comments are due 75 days after publication in the Federal Register. **We were somewhat surprised to see the positive treatment of mandatory arbitration, but then again arbitration has been used for decades in the labor relations field. What makes this endorsement of arbitration particularly significant is the recognition that a pre-dispute arbitration agreement can be fully consonant with a fiduciary relationship. Not all regulators and courts accept this view (for background, see SAA 2010-38; Galvin, SAA 2013-07). ***DOL has established a separate area on its Website where it has collected material on the rule. ****Dodd-Frank, which was enacted in July 2010, allows for the SEC to establish a fiduciary standard for brokers, but none has yet been created. The DOL’s action in our view will certainly increase pressure on the Commission to act.)
(SAC Ref. No. 2015-14-02)
Like what you see here?
Twice a week we present blog posts consisting of one write-up from each of our two flagship weekly online Alert services. Consider a subscription to these publications to receive the full array of coverage right on your desktop every week. Give it a try and sign up for a free trial to the Securities Arbitration Alert and the Securities Litigation Alert.