Today, the U.S. Department of Labor released its highly-anticipated Final Rule and Exemptions addressing when a person providing investment advice with respect to an employee benefit plan or individual retirement account is considered to be a fiduciary under the Employee Retirement Income Security Act of 1974 and the Internal Revenue
DOL Open to Changing Fiduciary Proposal, But Some Press for it to be Scrapped
As we wrote about here, in April the Department of Labor issued its highly anticipated, re-proposed regulation addressing the standard of care for broker-dealers and other financial professionals who provide retirement investment advice. Since its release, the proposed rule has come under fire from critics who maintain that the DOL proposal, while well intentioned, will ultimately limit access to affordable retirement services and result in investor confusion. Last week, the chorus of opposition grew louder as the proposed rule’s 90-day notice-and-comment period came to an end.
Sensing the growing opposition, earlier this month Timothy Hauser, the Deputy Assistant Secretary for Program Operations in the DOL’s Employee Benefits Security Administration (“EBSA”), signaled that the DOL is open to reworking its controversial fiduciary proposal. Speaking at a meeting of the Securities and Exchange Commission’s Investor Advisory Committee, Mr. Hauser said that, while the DOL is committed to addressing the issue of conflicted investment advice, the agency is not “wedded to any particular choice of words or regulatory text.”
The Battle Lines Continue to Form Over the DOL’s Fiduciary Proposal
Earlier this month, the Securities Industry and Financial Markets Association (“SIFMA”) released its “Proposed Best Interests of the Customer Standard for Broker-Dealers” – an alternative to the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers and other financial professionals who provide retirement investment advice. Unlike the DOL’s proposed rule, which we wrote about here, SIFMA’s across-the-board proposal emphasizes disclosure and investor consent as mechanisms to promote a uniform “best interest” standard.
In remarks accompanying SIFMA’s announcement, Kenneth E. Bentsen, the organization’s President and CEO, reiterated SIFMA’s support for a uniform standard to govern broker-dealers and investment advisers providing investment advice to retail customers. Mr. Bentsen highlighted a number of issues with the current DOL proposal, expressing specific concern that it would limit access to affordable retirement services and result in investor confusion. Mr. Bentsen explained that, given the increased liability risk and compliance costs associated with the current DOL proposal, firms have indicated that, if enacted, they plan to shift their commission-based brokerage accounts to (more expensive) fee-based accounts. Because, according to Mr. Bentsen, most firms are willing to provide fee-based services only for higher-balanced accounts, this could potentially leave millions of consumers with “no option for advice or guidance.” In addition, Mr. Bentsen said that “it is hard to see how investors won’t be confused” by the DOL’s proposed rule, which will apply different standards to broker-dealers when they provide retirement-related investment advice than when they provide investment advice that is not retirement related.
FINRA CEO Criticizes DOL Fiduciary Proposal (Again)
Last week, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”), doubled-down on his recent criticism of the U.S. Department of Labor’s (“DOL”) proposed regulation addressing the standard of care for broker-dealers providing retirement investment advice. Speaking at FINRA’s annual conference, Chairman Ketchum said that, while he supports a “best interests of the customer” standard, the DOL’s proposal – which we wrote about here – is “not the appropriate way to meet that goal.”
Chairman Ketchum expressed particular concern over language in the DOL proposal that would require an advisor to make recommendations in the best interest of the customer “without regard to the financial or other interests” of the advisor. He worried that this language could lead to class action lawsuits and arbitration where the standard would be misapplied, stating, “I’m not sure, but I suspect, a judicial arbiter might draw a sharp line prohibiting most products with higher financial incentives no matter how sound the recommendation might be.”
FINRA Chairman: SEC Should Lead on Uniform Fiduciary Standard
On May 1, 2015, Richard Ketchum, Chairman and CEO of the Financial Industry Regulatory Authority (“FINRA”), reaffirmed his support for a uniform fiduciary standard for broker-dealers. Testifying before the House Financial Services Committee, Chairman Ketchum emphasized that the U.S. Securities and Exchange Commission (the “SEC”) – and not the U.S. Department of Labor (the “DOL”) – is best suited to establish and implement a new industry-wide standard of care.
Chairman Ketchum’s comments come less than three weeks after the DOL issued its highly anticipated, re-proposed regulation addressing when a person providing certain types of retirement investment advice is considered a fiduciary under the Employee Retirement Income Security Act (“ERISA”) and the Internal Revenue Code (“Code”). At present, broker-dealer recommendations typically must be based on a reasonable determination that the investment is suitable in light of the investor’s financial situation and investment objectives. Under the proposed rule, broker-dealers providing retirement investment advice would be held to a higher (fiduciary) standard – they would be required to act in the best interest of their client.
SEC Approval of New FINRA Public Arbitrator Rule Imposes New Limits on the Pool of Potential Public Arbitrators
The SEC recently approved FINRA’s proposed new rule changes to the definitions of public arbitrator (FINRA Rules 12100(u) and 13100(u)) and non-public arbitrator (FINRA Rules 12100(p) and 13100(p)), after receiving over 300 comment letters in addition to two letters from FINRA responding to the comment letters. The new rule significantly limits the pool of potential public arbitrators by, chiefly, permanently disqualifying any person who worked in the financial industry from being a public arbitrator. FINRA believes that this and other changes to the definitions of public and non-public arbitrators, as discussed below, address both investor and industry concerns about perceived bias and arbitrator neutrality.
FINRA Cybersecurity Report Highlights Risks, Best Practices
On February 3, 2015, the Financial Industry Regulatory Authority (“FINRA”) issued its Report on Cybersecurity Practices. Reinforcing FINRA’s emphasis on protecting investor information, the report discusses the results of a recent industry-wide cybersecurity examination and presents a list of principles and best practices to guide the industry’s cybersecurity efforts going forward.
2014 Cybersecurity Examination
Last year, FINRA conducted a targeted examination of certain firms in the financial services industry. The examination sought information about various cybersecurity threats and firms’ particular vulnerabilities. The examination gathered information about firms’ approaches to managing these threats.
OCC No Longer Issuing Anti-Money Laundering Recommendations
Office of the Comptroller of the Currency (“OCC”) examiners stated on Monday that they will no longer make recommendations on how banks can better comply with anti-money laundering (“AML”) regulations. Rather, the policy change designates all AML problems either as matters requiring attention or as violations of law. Thus, all