06.21.19

Murray, Scott Ask Government Watchdog to Look at Fallout of Trump Administration’s Decision to Abandon Investor Protection Rule Following Fifth Circuit Order One Year Ago

Murray and Scott asked GAO to look at how the financial services industry has responded since the Trump Administration abandoned a rule requiring financial advisors to put their retirement clients’ interests before their own following the Fifth Circuit’s decision

 

Murray and Scott requested investigation on anniversary of the Fifth Circuit’s Order to vacate the Obama-era fiduciary standard that the Trump Administration declined to defend despite a Circuit split

 

Members: “In the past year, DOL appears to have done little, if anything, to warn retirement savers that they are now vulnerable to professionals who, according to DOL, have no obligation to put their clients’ interest before their own.”

 

Washington, D.C. – Today, Senator Patty Murray (D-WA), ranking member of the Senate Health, Education, Labor, and Pensions (HELP) Committee, and Congressman Bobby Scott (D-VA), chairman of the House Committee on Education and Labor, wrote to Government Accountability Office (GAO) Comptroller General, Gene Dodaro, asking GAO to examine the fallout from the Department of Labor’s (DOL) decision not to defend its fiduciary standard after a court decision struck it down—despite the fact that several previous rulings had upheld the standard. The letter was sent on the one-year anniversary of the ruling which struck down the fiduciary standard, an Obama-era rule which protected investors by requiring advisors to put their retirement clients’ interests ahead of their own.

 

 “In the past year, DOL appears to have done little, if anything, to warn retirement savers that they are now vulnerable to professionals who, according to DOL, have no obligation to put their clients’ interest before their own,” wrote the Members.

 

“Today, plan sponsors, financial services professionals, and investment advisors must decide whether to retain the new policies and procedures they developed, often at considerable expense, in response to the 2016 Rule,” their letter continued. “Meanwhile, plan participants may experience difficulty in understanding the various duties owed to them by those giving retirement advice and may be receiving conflicted advice.”

 

Full text of Senator Murray’s letter below, and PDF available HERE:

 

June 21, 2019

 

The Honorable Gene Dodaro

Comptroller General

U.S. Government Accountability Office

441 G Street, N.W.

Washington, D.C. 20548

 

Dear Mr. Dodaro:

 

We write to request an examination by the Government Accountability Office (GAO) of the response to the Department of Labor’s (DOL’s) 2016 Fiduciary Rule (2016 Rule) by the financial services industry and what has occurred since it was overturned.  Today marks the one-year anniversary of the Fifth Circuit issuing its Order to vacate in toto[1] the DOL’s 2016 Rule, including the Best Interest Contract (BIC) and the related prohibited transaction exemptions.[2]  DOL chose not to appeal and issued a Field Assistance Bulletin (FAB) to help industry understand its obligations and to communicate the DOL’s decision not to enforce the rule and its associated prohibited transaction exemptions.[3] Specifically, the FAB included a “non-enforcement policy” and specified that DOL would not pursue prohibited transaction claims against investment advice fiduciaries. In the past year, DOL appears to have done little, if anything, to warn retirement savers that they are now vulnerable to professionals who, according to DOL, have no obligation to put their clients’ interest before their own.

 

The Employee Retirement Income Security Act of 1974 (ERISA) established the concept of a retirement plan fiduciary over 40 years ago.  ERISA provides that certain actions or functions confer fiduciary status on an individual or entity.  Section 404 of ERISA explains the basic requirements of an ERISA fiduciary through the “prudent man” standard of care.[4]  These requirements essentially dictate that a fiduciary of a defined contribution plan should offer a prudent menu of investments that are competitive in terms of fees, and that are free from conflicts of interest, as should the information or advice provided to plan participants. 

 

ERISA became law when the retirement landscape consisted largely of defined benefit plans and before the widespread adoption of 401(k) plans and the technologically- and regulatory-driven explosion of new financial products.  In particular, Individual Retirement Accounts (IRAs), originally established as a supplemental savings vehicle, have accumulated trillions of dollars more in assets than 401(k) plans, partially due to guidance and marketing favoring IRAs, as documented in your earlier report, “Labor and IRS Could Improve the Rollover Process for Participants.”[5]  In 2016, the DOL sought to modernize the definition of a fiduciary by finalizing a “conflict of interest” rule that took into account these dramatic changes.  Understanding the 2016 Rule’s significance and the likelihood that it would soon be operational, many financial services firms took considerable action to comply in advance.  Some firms believed that the rule included many commonsense changes that were long overdue, particularly with regard to the provision of investment advice.  These firms revised their operations significantly, in some cases spending millions of dollars. After being upheld a number of times in various courts,[6] the U.S. Court of Appeals for the Fifth Circuit unexpectedly vacated the DOL’s rule in 2018, creating uncertainty and confusion for the financial services industry and the retirement world generally.[7]

 

Today, plan sponsors, financial services professionals, and investment advisors must decide whether to retain the new policies and procedures they developed, often at considerable expense, in response to the 2016 Rule.  One unclear alternative was to revert to the pre-2016 ways of doing business, restoring harmful conflicts of interest that had previously been eliminated to comply with the 2016 Rule.  Additionally, the Securities and Exchange Commission (SEC) recently promulgated a rule covering investment advice in the retail market.  While the SEC rule does not immediately implicate retirement plans, Secretary of Labor Alexander Acosta has indicated that DOL will collaborate with the SEC to issue a new fiduciary rule later this year, which may exacerbate the confusion.  Meanwhile, plan participants may experience difficulty in understanding the various duties owed to them by those giving retirement advice and may be receiving conflicted advice.  In light of these challenges, we would like GAO to address the following questions:

 

  1. To what degree did financial services firms, plan administrators and financial advisors serving defined contribution plans, 401(k) plan participants, and IRA investors assume a fiduciary role in response to the 2016 Rule?

 

  1. For those firms that initiated efforts to comply with the 2016 Rule prior to the Fifth Circuit’s decision:
    1. How did their product line change during this period (i.e., what new products, if any, were introduced and which products were de-emphasized to facilitate compliance, particularly with the 2016 Rule’s BIC exemption)?
    2. How did their compensation structure (e.g., commission vs. fee for service) of advisors and other staff change during this period?
    3. How did the amount of sales and revenue by product type change during this period?
    4. What were their aggregate compliance costs, and how did these costs vary by type (e.g., technology or training product development among other things)?
    5. What was the overall effect on plans, participants, and IRA investors?

 

  1. To what extent have those entities who assumed a fiduciary role continued to act as fiduciaries after the rule was vacated in 2018? To what extent have those entities who assumed a fiduciary role decided not to act as fiduciaries after the rule was vacated? Why did these entities choose their specific path?

 

  1. For the entities who continued to assume a fiduciary role after the rule was vacated and those that did not, to what extent, if any, has the rule being vacated affected:
    1. their product line;
    2. the amount of sales and revenue for by product type;
    3. compensation structure; and
    4. their aggregate compliance costs, and costs by type.

 

  1. To what extent will the SEC’s Regulation BI (Best Interest), which was finalized on June 5, 2019, cover advice to retirement savers and what protections will it extend to retirement savers and plan participants generally? Which retirement products will be subject to the SEC’s rulemaking?

 

We appreciate GAO’s assistance with this study.  If you have any questions concerning this request, please contact Kevin McDermott, Senior Labor Policy Advisor for the House Education & Labor Committee, at (202) 225-3725, and Kendra Isaacson, Senior Pensions Counsel for the Senate HELP Committee, at (202) 224-6572.

 

Thank you for your attention to this matter.

 

Sincerely,

ROBERT C. “BOBBY” SCOTT

Chairman, House Committee on Education & Labor

 

PATTY MURRAY   

Ranking Member, Senate Committee on Health, Education, Labor & Pensions

 

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[1] Chamber of Commerce of the U.S. et al v. Acosta, No. 17-10238 (5th Cir. Mar. 15, 2018) (vacating the fiduciary rule in toto). 

[2] Definition of the Term “Fiduciary;” Conflict of Interest Rule- Retirement Investment Advice, 81 Fed. Reg. 20,946 (Apr. 8 2016) (to be codified at 29 C.F.R. pts. 2509, 2510, and 2550); Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters, 81, Fed. Reg. 21,147 (Apr. 8. 2016) (to be codified at 29 C.F.R. pt. 2550); Best Interest Contract Exemption, 81 Fed. Reg. 21, 002 (Apr. 8, 2016) (to be codified at 29 C.F.R. pt 2550).

[3] DOL Field Assistance Bulletin No. 2018-02, “Temporary Enforcement Policy on Prohibited Transaction Rules Applicable to Investment Advice Fiduciaries” (May 7, 2018).

[4] 29 U.S.C. § 1104 (a) (requiring that a fiduciary discharge its duties (1) solely in the interest of plan participants and beneficiaries; (2) for the exclusive purpose of providing plan benefits or for defraying reasonable expenses of plan administration; (3) with the care, skill, prudence, and diligence that a prudent person in a similar circumstance would use; (4) by diversifying the plan’s investments to minimize the risk of large losses; and (5) in accordance with the plan’s documents.).

[5] U.S. Gov’t Accountability Off., GAO-13-30, Labor and IRS Could Improve the Rollover Process for Participants (Mar. 2013).

[6] Chamber of Commerce of the U.S. et al. v. Hugler, No. 3:16-cv-1476-M (N.D. Tex. Feb. 8, 2017); Nat’l Ass’n for Fixed Annuities v. Perez, 16-cv-1035, 2016 WL 6573480 (D.D.C. Nov. 4, 2016); Mkt. Synergy Grp., Inc. v. U.S. Dep’t of Labor, 16-CV-4083-DDC-KGS, (D. Kan. Feb. 17, 2017); Thrivent Financial for Lutherans v. Perez, No. 0:16-cv-03289 (D. Minn. Sept. 29, 2016); Mkt. Synergy Grp., Inc. v. Acosta, No. 17-3038 (10th Cir. Mar. 13, 2018).

[7] Chamber of Commerce of the U.S. et al v. Acosta, No. 17-10238 (5th Cir. Mar. 15, 2018) (vacating the fiduciary rule in toto).