House Committee Hears Expert Testimony on Fiduciary Proposal

The U.S. House Committee on Financial Services’ Subcommittee on Capital Markets hosted a hearing on Wednesday about the Department of Labor’s retirement security proposal, sometimes called the fiduciary proposal. The hearing proceeded largely along partisan lines, with Republicans pointing out flaws and Democrats noting merits.

The proposal, whose comment period closed January 2, would extend fiduciary status under the Employee Retirement Income Security Act to one-time transactions that are not currently fiduciary acts. These include investment menu design, annuity sales and rollovers to individual retirement accounts.

During the hearing, Subcommittee Chair Ann Wagner, R-Missouri, explained that this is the “fourth attempt” the DOL has made to regulate in this space, a reference to past rulemakings, one of which was struck down by the U.S. 5th Circuit Court of Appeals in 2018. Wagner argued that the proposal will only lead to the “disrupting of the client-adviser relationship” and severely restrict access to annuities and rollovers for lower-income retirement savers.

Wagner added that Regulation Best Interest, enforced by the Securities and Exchange Commission, and the current five-part fiduciary test enforced by the DOL “fully protect consumers seeking financial advice.”

Arguments for …

Representative Brad Sherman, D-California, said the proposal needs some improvements, but “we need a regulation in this space.” He urged the DOL, as many commenters did, to more clearly exclude educational materials and “hire me” conversations in which an adviser pitches their services to an ERISA plan.

Sherman also entered into the subcommittee’s record a letter written by national retiree advocacy group AARP. The lobby group’s statement supports the proposal, arguing that “when Americans seek out financial advice for their retirement savings, they expect the advice they get will be in their best interest, not in the best interest of their financial adviser. This is very simply what the Retirement Security Rule does.”

The letter also states that “regulatory loopholes allow some financial advisers to recommend that their clients invest their retirement savings in products simply because the adviser will get higher fees and commissions for doing so” and that the proposal “closes a glaring loophole that allows some advisers to offer very bad advice to their clients, as long as they only do it once.”

A representative of AARP did not testify at the hearing.

Kamila Elliott, the CEO and founder of Collective Wealth Partners, testified at the hearing representing the Certified Financial Planner Board in support of the proposal.

She argued that under current law, “financial professionals can be paid handsomely for advice that is not in the investor’s best interest.” She added that “financial professionals should not be allowed to make recommendations that compensate them well but burden the client with excessively high fees, unnecessary risk or harmful illiquidity.”

Elliott noted that CFPB certificants abide by a fiduciary standard, even with one-time recommendations, and are still able to service smaller accounts.

The CFPB has been a supporter of the proposal.

… and Against

Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute, who testified at the hearing, sided with Subcommittee Chair Wagner in arguing that the proposal would hurt low-income savers.

Many professionals, he argued, would not be able to work with smaller balances because the costs associated with regulatory compliance and risk would make these smaller accounts no longer worth servicing. He added that “this proposal is not fixable.”

The IRI has been an opponent of the proposal throughout its rollout.

Brad Campbell, a partner in the Faegre Drinker law firm and a former assistant secretary of labor, testified that the DOL was going beyond its authority by regulating IRAs.

“The reason we are here today is that the proposals go well beyond DOL’s limited authority,” Campbell noted in written testimony. “In fact, the proposals would make DOL the primary financial regulator of $26 trillion, approximately half of which is held by individuals in individual retirement accounts and annuities (“IRAs”) rather than employer-provided plans.”

He argued in his remarks that individuals receiving financial assistance from insurance, securities and bank professionals are subject to other state and federal securities and banking regulation.

“If the proposals were finalized,” he testified, “and those individual accounts were subjected to the department’s authority in a manner similar to employer-provided plans, those insurance, securities and bank professionals serving them would now have to comply with a new, highly detailed, and very proscriptive federal regulatory regime led by the Labor Department that would simultaneously apply with—and in many cases, materially conflict with—the requirements of their ‘normal’ state insurance regulation, state and federal securities regulation, or state and federal banking regulation.”

The DOL has not yet announced a timetable for finalizing the proposal.