House Puts Lid on Fiduciary Update

House members voted 254-166, largely along party lines but with some Democratic support, to approve the Retail Investor Protection Act. Passage of the act into law is widely deemed impossible, given the political makeup of the U.S. Senate and the White House.

During hours of debate, many House members took up arguments warning additional limits placed on advisers and broker/dealers would do more to damage their clients’ retirement preparedness than stamp out conflicts of interest.

“Due to technological advances and the relatively low cost associated with operating an online platform … brokers can offer trade and investment advice for as little as seven dollars,” said Jeb Hensarling, a Texas Republican and chairman of the House Financial Services Committee. “Should a fiduciary standard be applied to these online brokers, the impact on investors could be … higher fees per trade, higher fees for investment advice, or brokers may simply stop providing this investment advice to less affluent customers altogether.  That is not fair.” 

Democratic members opposed to the bill argued that a unified fiduciary standard would ensure advice in retirement planning settings is given in investors’ best interests.

Advisers and broker/dealers have long worried a regulatory update could force all financial professionals providing advisory or brokerage services to retirement plan participants into a fiduciary relationship.

Within such a relationship, advisers or broker/dealers are required by law to put the investors’ interests ahead of their own. For example, an adviser could be prohibited from promoting IRA rollover services to existing clients if he or she would receive more in fees because of that promotion.

Raising the Stakes for Brokers/Dealers

Many advisers working with retirement plans are already held to such a fiduciary standard. Broker/dealers could have more to lose as they are required by law to offer service and advice that is deemed only “suitable.”

Another stipulation in the bill would force the DOL to wait until the SEC has released a fiduciary update before issuing its own. That tactic could significantly lengthen the time before an update is enacted, as the DOL’s new definition could be released soon—perhaps within the next few weeks.

According to the Retail Investor Protection Act, “the Secretary of Labor shall not prescribe any regulation under the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.) defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the Securities and Exchange Commission issues a final rule relating to standards of conduct for brokers and dealers pursuant to the second subsection (k) of Section 15 of the Securities Exchange Act of 1934.”

The bill goes on to say the Securities and Exchange Commission (SEC) cannot issue its final rule until determining whether retail investors are being harmed by the differing standards and whether adopting a uniform fiduciary definition of would adversely impact retail investors’ access to personalized investment advice.

During a recent speaking engagement, Assistant Secretary of Labor Phyllis Borzi of the DOL’s Employee Benefits Security Administration (EBSA) said the agency is “very close to finishing” a new definition of fiduciary She assured the audience that EBSA is working closely with the SEC on the regulations.

For input from industry groups on the pending definition updates, see “Groups Urge SEC to Uphold Fiduciary Standard.”

Text of House bill H.R. 2374 is here.