SIFMA Submits Comments On Department Of Labor's Proposed Retirement Regulation

Today, SIFMA submitted comments to the Department of Labor (DOL) in response to its proposed retirement regulation, stressing concerns that the proposed rule will harm investors by limiting access to financial guidance, reducing choice and ultimately raising the cost of saving for retirement.

"We agree with the DOL that more can be done to help Americans save for retirement and that there should be a best interests standard in place; however, we believe DOL is the wrong regulator to be in the lead here and the rule as written completely misses the mark," said Kenneth E. Bentsen, Jr., SIFMA president and CEO. "SIFMA's comment letters reflect our ongoing concerns that the DOL's proposal would cause harm - particularly to low and middle-income retirement savers - by limiting investors' access to choice and guidance, while raising the cost of saving."

SIFMA submitted eight comment letters on the DOL's proposed rule to redefine fiduciary under the Employee Retirement Income Security Act (ERISA) addressing: 1) the fiduciary rule itself; 2) the Best Interest Contract Exemption; 3) the Prohibited Transaction Class Exemption (PTCE) for Principal Transactions in Debt Securities; 4) the PTCE 86-128; 5) the PTCE 84-24; 6) the PTCE 75-1, Part V; 7) the additional exemptions; and 8) the SIFMA Asset Management Group.

The letters were accompanied by an executive summary and two studies: 1) NERA, providing a response to the DOL's regulatory impact analysis; and 2) Deloitte, addressing the operational impact of the DOL's proposed rule.

Expanded Definition of Fiduciary:

Due to the expanded definition of fiduciary, the DOL's proposal would eliminate conversations that were intended to help investors prepare for retirement, leaving them without investment guidance:

Investor Impact: When deciding to hire an advisor, investors could no longer have an initial conversation on the types of services that may be provided by the advisor should they choose to work together.

Small Business Impact: Providers will no longer be able to pitch services or have conversations about the benefits of their services with small business owners to help them and their employees to help them save for retirement, as it would be seen as a fiduciary conversation.

Rollover Impact: Rollover conversations would be restricted for individuals changing jobs. GAO estimates that cashouts at job change lead to a loss of $74 billion annually from the retirement system. Under the DOL's proposal, much needed education at the time of rollover would be stifled.

Best Interest Contract Exemption (BIC exemption):

The BIC exemption is unworkable, and will eliminate choice and raise the cost of saving. It imposes tremendous obstacles to broker-dealers, along with disclosure requirements that would not only overwhelm customers with more information than they can possibly digest, but also impede customer transactions and create losses for certain retirement accounts that would be forced to sell investments the DOL has deemed unworthy for plans or IRA accounts.

Investors will no longer be able to choose the level of advice they desire at the price they want to pay. Complying with the BIC and other proposed exemptions will impose significant additional costs on broker-dealers, which will make it extremely difficult, if not impossible, for smaller retirement accounts to remain in a brokerage model and receive one-on-one financial advice from the advisors who currently serve them. Those that remain could face potentially higher costs, as they are moved into a different, more costly relationship with their financial advisor.

This is particularly troublesome for low to middle-income savers, as currently, 98 percent of IRA investors with less than $25,000 are in brokerage relationships.

Without education, there could be accelerated leakage of retirement savings out of tax-advantaged accounts, and widespread confusion on the part of retirement investors, neither of which is in their best interests.

Education Exception:

The education exception was drafted too narrowly, and will leave investors lost with only the internet for information. SIFMA believes that the proposal should allow for the naming of products. As written, investors will not be able to receive guidance on individual investment options. Under the proposal, they may only receive guidance on broad asset classes, not specifics within each class. Without adequate education, investors will be lost with only the internet to guide them.

Seller's Exception:

The seller's exception was drafted too narrowly and is legally inconsistent. SIFMA believes it should apply to IRAs and small plans, as it currently only covers accounts with over 100 participants. If a financial professional makes clear he is selling, then it is inconsistent in the DOL's proposal to suggest that selling is a fiduciary activity when the target is a retail account, but not fiduciary when it is a large plan context. This should be legally consistent.

SIFMA also recommends that the seller's exception cover services where the service provider is acting as a representative of the plan, instead of, as written, only with respect to a sale, purchase, loan or bilateral contract, and not with respect to services provided to accounts.

Asset Management:

The DOL's proposal will harm investors by hampering the ability of asset managers who are already fiduciaries under ERISA from acting in the best interest of plans and IRA clients. The proposal will restrict asset managers' ability to provide information and make the products and services they provide, and those that are provided to them, less available and more expensive. Also, asset managers and investors, already deemed sophisticated, will be burdened by standards designed for retail retirement savers.

Further, asset managers, in their separate role of creating and managing funds and investment products purchased by plans and IRAs, may not be able to offer a variety of products given the limiting effect of the proposed rule and the BIC Exemption

As a result, plan performance may suffer, as asset managers and their offered products become restricted by the proposed rule and the BIC Exemption.

Flawed Cost & Benefit Estimates:

SIFMA challenged the DOL's implementation and operations cost estimates as unfounded, inaccurate, and fatally flawed, while highlighting the faulty premises and defective methodology that underpin the DOL's cost analysis. The DOL fails to show how this proposal would benefit the public quantitatively, but also underestimates greatly the harm that this would cause American investors. It has no study data to compare the performance of accounts managed by a fiduciary versus a non-fiduciary and cannot reasonably conclude that investors would be better off under an expanded fiduciary standard on the basis of the studies cited. Finally, the DOL misapplied academic research that is key to its conclusions. The range of the DOL's estimates of benefits is so wide as to raise serious questions on applicability and credibility.

Specifically, the DOL inappropriately relies on data submitted by SIFMA to the SEC two years ago for an entirely separate and distinct cost estimate, and inappropriately applies it to estimate the costs of the DOL proposal, which are completely different.

Commission-Based vs. Fee-Based Account Performance (NERA Analysis):

To address shortcomings in the DOL's regulatory impact analysis, SIFMA included in its comments a study conducted by NERA Economic Consulting based on customer account-level data provided by SIFMA member firms.

It finds that commission-based accounts do not underperform fee-based accounts and that over 57% of retirement holders would lose access to financial advice if the proposal were implemented. It also finds that investors choose the fee model that best suits their needs and trading behavior. In 2014, the median trade frequency in commission-based accounts was just 6 trades versus 57 trades in fee-based accounts, with larger accounts trading more frequently than smaller ones.

Thus, the data are consistent with the idea that investors who expect to trade often rationally choose fee-based accounts whereas those that do not trade often are likely to choose commission-based accounts and pay much less than a fee-based account customer. Finally, it points out key flaws in the way that the DOL applied existing academic literature to its analysis of the rule proposal.

Operational Impacts (Deloitte Report):

A report was conducted by Deloitte in conjunction with SIFMA on the operational impacts of the DOL's proposed rule. It finds that several requirements of the DOL's proposal will be unfeasible or impossible for firms to operationalize within existing business, operational and compliance frameworks, noting concerns with the BIC's and PTEs' contract and disclosure requirements. It also finds that multiple components of the DOL's rule would impede open dialogue on investment choices and education for customers and that the DOL's proposal directly contradicts multiple regulatory rules and guidelines firms are currently required to follow. Finally, the survey estimates that, for large and medium firms in the broker-dealer industry, total start-up costs alone would be $4.7 billion and on-going costs would be $1.1 billion. This is nearly double the estimated cost provided by the DOL in its analysis.

Comment Letters:

Studies: