Securities industry scare tactics designed to serve industry, not retirement investors

Millions of American investors put their trust in financial professionals every day to help them plan for retirement and other major life events. But when investors depend on financial professionals for their investment needs, they often don’t realize that those professionals may not be serving their best interests. That is because regulatory loopholes allow salespeople to pass themselves off as trusted advisers, without being subject to the appropriate standards to which those who provide money management or advisory services are traditionally held.

Not being subject to the appropriate professional standards that accompany a position of trust allows these salespeople masquerading as advisers to serve their own interests at their clients’ expense. In practical terms, they can engage in self-dealing transactions, steering their clients into investments that maximize their own profits with little regard for whether they carry higher costs, more risk, and poorer performance for their clients than available alternatives. The financial consequences of this harm can be significant, as seemingly small cost increases compounded over a thirty- or forty-year horizon can decrease a portfolio’s value by tens or even hundreds of thousands of dollars. For middle-income Americans, the slow and steady siphoning of their nest eggs can be devastating. 

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Both the Department of Labor (DOL) and Securities and Exchange Commission (SEC) are working to close the regulatory loopholes that exist so that investors are adequately protected from these types of harm. Each agency is working in its respective area of jurisdiction—the DOL in the employment-related retirement context and the SEC in the securities context.

But there are some in the financial industry, including most recently Kenneth E. Bentsen Jr., president and CEO of Securities Industry and Financial Markets Association (SIFMA), who are engaging in scare tactics that are designed to stop either or both agencies from moving forward. Specifically, Bentsen is making unsupported claims, including that “the DOL’s proposal would likely interfere with the SEC’s efforts, raise costs, restrict access to individual guidance and limit choices.” As a result, he argues, the DOL “should stand down and allow the SEC to continue its work.”

First, the DOL has not yet issued its proposal, so any claims about what it would likely do are not factually based and in fact are directly contradicted by statements from agency officials.  Second, when Congress adopted the Employment Retirement Income Security Act (ERISA) in 1974, it gave the DOL clear authority to implement rules to establish different, higher standards for retirement accounts than those that apply under federal securities laws. And Congress clearly expressed its intent to treat retirement accounts differently from retail accounts by subsidizing retirement assets through preferential treatment in the tax code. In light of the fact that Congress established separate jurisdiction and different standards for the DOL and SEC, it is unreasonable to expect that the DOL would cede jurisdiction to the SEC. Still, despite their independent and unique authorities, both agencies have confirmed that they are coordinating and in close and frequent consultation regarding their respective roles. They have also provided assurances that their regulations will not conflict.

Third, the argument that investors would lose access to services is based on a mischaracterization of the DOL’s expected rulemaking approach. Despite the fact that DOL officials repeatedly have said that commission-based compensation will still be permitted under its updated rule, industry participants like Bentsen continue to perpetuate the myth that middle-class investors who pay commissions for investment advice will be “left out completely as a result of the DOL’s proposal.” That’s just not the case.

It is ironic that some industry participants have invoked concern over middle-class investors to justify their opposition to DOL rulemaking, because it is middle-class investors who have the most to gain from stronger protections when they seek investment advice.  After all, it is these investors with limited financial resources who can least afford to pay the excess costs often associated with the less than optimum investment recommendations. Moreover, the DOL rulemaking is particularly relevant for these investors, as they are most likely to be investing primarily or even exclusively through the various types of workplace or individual retirement accounts (IRAs) that would likely be affected by an updated DOL rulemaking.  Given our nation’s retirement savings shortfall, we simply can’t afford not to act.

It is clear that some in the financial services industry are prospering under the existing system that allows them to put their self-interest first and at the expense of their clients. They are engaging in nothing less than scare tactics that are aimed at preserving the status quo, which serves them well. However, the status quo leaves investors vulnerable to being taken advantage of. It is therefore imperative that both agencies move forward promptly to modernize their regulatory frameworks and adequately protect investors.

Hauptman is Financial Services counsel for the Consumer Federation of America.