Wall Street warns of threat to investors

Labor Secretary Tom Perez is coming under pressure from Wall Street to scrap a rule-making effort that could affect millions of retirement accounts.  

The Labor Department intends to put forward a controversial regulation that would broaden the definition of “fiduciary” status so that it covers more financial advisers.

That’s struck fear into financial industry officials, who say the rule change could put many investment advisors out of business while raising costs in popular plans like investment retirement accounts (IRAs).

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Trade groups want Perez to take another look at the rule before his department moves forward.

“He is a new player in this, and his voice is going to be very important in this,” said a financial services executive who was in Washington this week to lobby lawmakers. “I think the hope is that he will take a fresh look at it.”

Financial advisers are worried that the expanded fiduciary definition will affect brokers who earn one-time commissions for selling IRAs to clients. They believe brokers would have to become investment advisers and charge periodic fees instead, putting their livelihoods at risk. 

“We continue to worry about the type of advice that our advisers can give to small investors,” said Robert Lewis, vice president of legislative affairs for the Financial Services Institute.

Lobbyists for the financial industry are hoping for a “reset” in the lobbying battle over the fiduciary rule, which dates back to 2010, when the Labor Department first proposed it. The department withdrew the rule in 2011 but intends to repropose it. 

Perez has vowed to take a “careful, thorough and inclusive” approach to regulating, but has shown a willingness to use his regulatory powers aggressively.

After taking office in July, Perez cleared a backlog of regulations on wages, hiring and chemical exposure that had built up during the Obama administration. 

The rule-making effort on fiduciary status, in contrast, has yet to begin again — and the financial sector hopes it never does.

The Securities Industry and Financial Markets Association (SIFMA), a powerful lobby group for the financial sector, brought in about 20 executives this week to talk to lawmakers about their concerns about the rule. 

Lisa Bleier, a managing director for
SIFMA, said it was the group’s fourth visit devoted specifically to the fiduciary issue.

“Having to charge a quarterly fee for financial advice is just not feasible for the smaller accounts. That is too much money that will come from the smaller accounts,” Bleier said. 

Lewis’s trade group has organized roughly a half-dozen lobby trips to Washington this year to talk about the rule with lawmakers. 

A Labor representative said  the department intends to repropose the rule, and its “priority is to get it right, rather than meet an arbitrary timetable.” The official also emphasized that the rule would include exemptions for brokers’ compensation.

“Broadly speaking, the department intends to promulgate exemptions that will permit brokers to continue to receive appropriate compensation, while minimizing the impact of dangerous conflicts of interests,” the representative said.

Those sentiments haven’t calmed opponents in the financial sector.

“We haven’t seen the rule,” the financial services executive said. “When the Department of Labor talks about exceptions for commissions, they talk about it in a very narrow way. The industry is still concerned that those exceptions could be too narrow so that IRAs cannot be opened for small investors.”

Public interest groups, on the other hand, are cheering the agency on.

They argue brokers are sometimes compensated to get people into certain investment plans, rather than plans that perform better for their clients. The fiduciary rule, watchdog groups argue, would force brokers to put their clients’ interests first.

“The last thing we need is retirees seeing their funds siphoned off by excessively high costs for mediocre investments,” said Barbara Roper, director of investor protection for the Consumer Federation of America. “They need recommendations on investments that are in their best interests, not brokers’ self-interest.” 

Phyllis Borzi, assistant secretary of Labor of the Employee Benefits Security Administration, is behind the effort. 

She says the rule is intended to protect investors from the conflicts of interests that have arisen in the booming 401(k) and IRA markets since 1975, when the Labor Department last updated its fiduciary regulation.

“Due to the changing nature of the retirement marketplace, particularly the dramatic growth in IRAs and the shift away from pensions toward defined contribution plans, today’s investors are more reliant on investment advice than ever before, but the old laws don’t provide adequate protection. 

That leaves millions of workers and employers vulnerable to conflicted investment advice, and that conflicted advice can reduce workers’ savings,” Borzi said in a statement to The Hill. 

The financial industry would rather see another agency — the Securities and Exchange Commission (SEC) — move first on a fiduciary rule before the Labor Department acts. 

“I have more confidence that they [the SEC] will have more understanding of the impact on the small investor. They recognize the benefits of the commission-brokerage model. They recognize its services, and they have studied the issue in the past,” said Bleier of SIFMA. 

Watchdogs say Wall Street is worried that the Labor Department will issue a tough rule.

“Part of it is their [financial industry’s] fear of ERISA [the Employee Retirement Income Security Act], and part of it is their fear of Phyllis Borzi. She’s just tough. She’s not as sympathetic to their arguments as the SEC is,” Roper said.  

The House passed legislation last month that would not allow the Labor Department to issue its own rule until 60 days after the SEC offers its own proposal. The bill is not expected to move in the Senate, so lobbyists are awaiting the department’s next move.

“If it is the same thing as the last time, we will continue to oppose it,” Lewis said. 

Ben Goad contributed to this report.