Steve Hall of Better Markets at a U.S. Department of Labor public hearing on proposed rules to protect the retirement savings of millions of Americans. You can find out more about the event here.
You can find out more about our views on these important proposals here.
The video and text of Hall's remarks are below:
Good morning My name is Stephen Hall and I am Legal Director and Securities Specialist for Better Markets. Better Markets is an independent, nonprofit organization committed to reforms that make our financial markets more stable and fairer for all Americans who want to build a better financial future. We welcome the opportunity to testify at this important hearing.
We strongly support the DOL's collection of proposed rules and commend the DOL for taking steps to better protect retirement savers from the powerful conflicts of interest among financial advisors that cause real harm. We offer three main points in our statement:
First, Advisor conflicts of interest continue to take a tremendous toll on the financial resources and quality of life that millions of American workers are able to maintain in retirement. The damage is in the order of tens of billions of dollars per year.
Second, the DOL proposals, and particularly the updated definition of an investment advice fiduciary, are imperative to mitigating the harmful effects of conflicting investment advice. The current definition is nearly 50 years old and still contains major loopholes that allow advisors to shirk their fiduciary duties and put their own interests ahead of the well-being of their clients. The DOL's proposed rule would close these gaps.
ThirdNo convincing arguments are put forward against the proposals. For example, contrary to the claims of some opponents, neither the SEC's Regulation Best Interest nor state insurance regulations are adequate substitutes for the protections in ERISA. Furthermore, pension savers with small nest eggs will not lose access to advice once these important rules are in place. Finally, disclosures alone cannot adequately protect retirement savers.
I would now like to turn to the damage that conflicting investment advice continues to cause retirement savers.
For decades, advisors of all stripes have been allowed to push retirement investors into investment products, trading strategies and account types that cost too much, carry excessive risk, tie up savings in illiquid investments and offer poor returns. The advisors increase their profits, win bonuses or receive lavish non-cash bonuses, while the investors' retirement savings are depleted. This practice causes enormous harm to investors and is particularly acute in rollover transactions. These are crucial moments for retirees, where their entire savings are often at the mercy of an advisor who may not have the investor's best interests at heart. Overall, numerous studies show that advisor conflicts of interest cost tens of billions of dollars in lost retirement savings each year. These estimates are conservative because they examine the destructive effects of conflicts of interest only with respect to certain types of accounts and certain types of investments in those accounts.
This pattern of behavior is uniquely harmful, predatory, and fundamentally contradictory to what Congress said and intended in ERISA. Finally, the law categorically prohibits advisors from acting out of conflicts of interest or engaging in self-dealing of any kind, subject to exceptions that the DOL has the authority to create.
But since 1975, the rules defining investment advisory fiduciaries have had major loopholes that allow advisors to avoid the obligations imposed by ERISA. For example, the rule requires regular advice to be given, which will highlight many rollover recommendations regardless of how much money is at stake. Second, the rule provides that the advice must be provided under a mutual agreement or understanding that the advice will serve as the primary basis for the client's investment decision. Consultants have often exploited this meaningless requirement by discarding it in small print contracts, thereby avoiding the obligations that ERISA would otherwise impose. None of these elements in the current five-part test are found anywhere in ERISA, which defines a fiduciary simply and broadly as a person who “provides investment advice for a fee or other remuneration.”
Now I turn to the proposed reforms. First and most important is the changed definition of an investment advisory fiduciary. Critically, this closes the gaps in the rule base and primary base in the 1975 rule and ensures, for example, that rollover recommendations and advice to planning sponsors are covered by ERISA. The amended definition is appropriately broad and protective. For example, the elements “compensation” and “recommendation” are defined in detail, the effects of evasive exclusions of liability are expressly negated and no exceptions are made for supposedly experienced investors.
At the same time, the proposal sets appropriate limits. For example, in an adaptation of the Fifth Circuit's 2018 opinion, this only applies if the advice can reasonably be expected to be individualized and the investor can trust and rely on that advice. In addition, all business models, including commission-based sales, will remain intact. And the DOL has sought to align the elements of the definition with the provisions of the SEC's Reg BI and the standards of the Investment Advisers Act, all with the goal of minimizing compliance costs.
The proposal also provides beneficial adjustments to the Prohibited Transaction Exceptions (PTEs). I would like to note that we have already raised concerns regarding PTE 2020-02 that its 2020 version actually did not go far enough to protect pension savers. We will continue to consider these questions as we comment on the proposal. However, it is clear to us that PTE 2020-02, in conjunction with the new definition rule, will make an enormous contribution to protecting retirement savers from advisors' conflicts of interest.
Finally, I will briefly address some of the most common arguments against these reforms. None of them are convincing.
First, Contrary to some claims, there is no other regulatory regime that adequately protects pension savers from conflicting investment advice. The SEC's Reg BI applies only to recommendations regarding securities. Still, retirement savers are often advised to purchase a wide range of non-securities products, including fixed-indexed annuities, real estate, cryptocurrencies, precious metals, CDs, and derivatives such as futures and options. In addition, Reg BI only applies to individual private customers. This means, for example, that advising an employer that wants to provide its employees with a menu of high-quality investment options remains vulnerable to conflicting investment advice under Reg BI.
State insurance regulation also cannot come close to closing the current regulatory gaps in the DOL rules. The model annuity transaction rule adopted by the National Association of Insurance Commissioners is a “best interest” standard in name only. Nothing prohibits manufacturers or insurers from putting their interests above the interests of their customers. Instead, it says tenuously that an insurance producer has “fulfilled” its obligation to serve the consumer's welfare when it merely has “a reasonable basis for believing that the recommended option effectively addresses the consumer's financial situation and insurance needs.” Furthermore, the NAIC Model Rule notably excludes both cash and non-cash benefits from its definition of a “material conflict of interest,” even though such forms of compensation obviously create the most severe conflicts of interest. Additionally, like Reg BI, the NAIC Model Rule does not cover advice to planning sponsors.
Second, Small account savers do not lose access to advice. Claims to the contrary are scaremongering that has no credible support either in theory or in practice. The proposal initially aims to retain existing consulting models from a fee-based to a commission account. In principle, companies of all kinds are free to continue their business activities as before, provided they act in the best interests of their customers when providing advice.
Experiences in the investment advisory market also belie fears of a loss of access. Many financial professionals, including certified financial planners, already successfully practice fiduciary standards and serve clients across the income spectrum. Furthermore, the proposal is largely consistent with the SEC's regulation. BI, and there is no evidence that this has restricted small savers' access to investment recommendations. And in states where broker-dealers are subject to fiduciary duties under state law, there is no evidence that lower-income retirement savers have been denied access to quality advice. Far from harming small savers, the proposal would provide them with important protection, as they are the most vulnerable to losses resulting from advisers' conflicts of interest.
Third and finally: Although disclosure is an important part of any investor protection regime, it alone cannot adequately protect investors from abuse by financial professionals. Based on experience and expert studies, we know that disclosure is subject to numerous shortcomings. Often investors don't read them, don't receive them on time, or don't understand them. Even when effective disclosures are made, investors often remain uncertain about what actions to take in light of the disclosures. In addition, disclosures can easily be overridden by advisors' assurances that the disclosures are merely technical samples. Above all, it is clear that reliance on disclosure is not what Congress intended with ERISA, which imposes the most stringent positive obligations and restrictions on those who provide investment advice to retirement savers.
This concludes my statement and I look forward to any questions.
Comments are closed.