At a hearing before the House Financial Services Subcommittee on Capital Markets, Securities, and Investment, several financial industry professionals (the "panelists") discussed potential negative effects of the Department of Labor ("DOL") Fiduciary Rule (the "Rule"). The panelists expressed confidence in the SEC to develop standards of care for broker-dealers. They expressed support for a bill, proposed by Representative Ann Wagner (R-MO), that would repeal the DOL Rule and create new conduct standards for broker-dealers (see Committee Memorandum and Written Testimonies).
Panelists argued that the DOL Rule has already adversely impacted investment advisers and their clients (The application date was June 9, 2017.) Panelists claimed that the January 1, 2018 full compliance date for the related exemptions (including the Best Interest Contract Exemption ("BICE") and Principal Transactions Exemption) will impose additional burdens. David Knoch, speaking on behalf of the Financial Services Institute, said that the Rule contributes to an "overly complex and increasingly burdensome regulatory environment." He supported the draft bill introduced by Rep. Wagner and advocated for a uniform standard to be enforced by the SEC. In that regard, he said that the SEC has clear authority and relevant expertise to effectively develop and manage a standard of care both for broker-dealers and for investment advisors.
Industry panelists argued that the BICE will make broker-dealers susceptible to frivolous litigation by allowing for dissatisfied customers to file class action lawsuits. American Action Forum President Douglas Holtz-Eakin cautioned that this will place an undue burden on broker-dealers:
"In 2016 alone, consumers filed nearly 4000 arbitration cases with [FINRA] alleging some wrongdoing by broker-dealers. However, yet only 158 cases were decided in favor of the consumer. This means many broker-dealers spent significant time and money defending themselves, and perhaps unnecessarily. One could expect [BICE] litigation to fall along the same lines, but with the added threat of class action lawsuits and, at times, their resulting settlements."
Panelists argued that the DOL Rule will continue to drive industry participants toward relying on primarily fee-based models. In moving away from commission-based models, panelists said that several negative results are likely, including: (i) broker-dealers will be unable to afford compliance or to justify added risk, and will be forced out of certain markets, or (ii) lower and middle-income investors will be forced to pay higher fees or will be priced out of being able to afford investment advice. Many investors, panelists claimed, have already lost their access to investment advice from professionals as a result of not being able to afford minimum account balance requirements for fee-based arrangements. Now, panelists said, many of these investors only qualify to receive automated investment advice. Transamerica Senior Director Mark Halloran, speaking on behalf of the American Council of Life Insurers, commented:
"[T]he DOL concedes that these automated asset allocation services likely do not offer the same benefits as financial professionals – benefits that include encouraging greater savings, responding to client-specific questions, and dissuading emotional investing, such as liquidating assets during a downturn like the 2008 market crash. The DOL has failed to explain how computer-generated asset allocation platforms, given these crucial limitations, can serve as an adequate substitute for a financial professional."
Contrary to most of the testimony, AARP Financial Security and Consumer Affairs Director Cristina Martin Firvida expressed support for the Rule.
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