DOL Says It Will Modify Fiduciary Rule Proposal Involving Retirement Accounts

In the wake of criticism regarding its proposed rule to enhance the investment advice standards that brokers must abide by when working with retirement accounts, the U.S. Department of Labor official reportedly will make modifications. Under the current proposal, brokers would have to act in their clients’ best interests in individual retirement accounts and 401(k) accounts.

The Labor Department introduced the fiduciary rule proposal earlier this year with the backing of the White House. Public comments were sought.

Members of the financial industry have been critical of the proposal’s provision over best interest contract exemption. By signing a legally binding duty with a client to be in a fiduciary relationship with him/her, a broker is entitled to collect compensation in numerous ways, including commissions, as long as he/she acts in that client’s best interests. Some have expressed concern that such an agreement at the start of talks between a potential client and a broker could be problematic. Others are worried that certain costly changes would have to take place for brokers and their firms abide by the rule, and clients may end up having to foot the extra fees.

Potential regulatory burdens for brokers have also been cited by members of both political parties. Some are worried that brokers would be less likely to work with investors with more modest portfolios.

Even the Financial Industry Regulatory Authority says that the DOL’s proposal will cause confusion. In its comment letter, the regulator said the proposal was unclear and that such “ambiguities” would require “interpretive guidance.” FINRA said financial institutions, retirement investors, and advisers could get confused.

The agency says that as it currently stands, the proposal would put into place a best interest standard for brokerage firms that is very different from the fiduciary standard that registered investment advisers must follow. Also, with the investment adviser rules under the SEC, FINRA’s own broker requirements, the proposed DOL rule, up to six sets of rules could end up applying to an investment product.

FINRA wants the DOL to clarify its standard and come up with a simpler way for dealing with different compensations level for products in a retirement account. The agency also wants the Labor Department to work with current FINRA rules and securities laws as the foundation for a revised proposal. The regulator is suggesting the streamlining of the best interest contract exemption so that conflicts of interest are better restricted and penalties for breach of agreements are clear.

In June, US Secretary of Labor Thomas Perez reminded lawmakers that the proposed rule is geared toward protecting investors from brokers who match them with products that come with high fees or deplete retirement savings when lower cost alternatives exist that could have benefitted them just as much. Perez notes that the government wants to establish a best-interest standard that is “enforceable” and “empowers consumers.”

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Finra brands DOL fiduciary rule misguided, confusing, InvestmentNews, February 18, 2015

U.S. Department of Labor’s Fiduciary Rule for Retirement Advisers Hits Another Snag, Stockbroker Fraud Blog, February 6, 2015

The Department of Labor (DOL) has proposed a change to the definition of fiduciary under the Employee Retirement Income Security Act (ERISA) that would expand the scope of those who become fiduciaries, SIFMA