U.S. House Votes to Delay Rules on Retirement Investment Advice
The U.S House voted to delay a Labor Department effort to expand investor protections for more than $13 trillion worth of private retirement accounts, including 401(k)s and IRAs.
The legislation, which passed 254-166 yesterday, would stop the department from issuing a proposal to prevent conflicts of interest in retirement-investment advice until 60 days after the Securities and Exchange Commission finalizes a similar rule. The bill also would make the SEC rule-writing task harder by requiring the agency to show that investors have been harmed by existing rules governing brokers’ advice.
The agencies have been working on regulations to require more investment professionals to give advice that is in their clients’ best interests, meeting a standard known as fiduciary duty. The Labor Department proposal would expand that standard to more providers of retirement accounts while the SEC rule would apply to sales of securities. The White House opposed the bill, which now goes to the Democrat-controlled Senate.
“It only got 30 Democratic votes. That in our view is a very good result,” Barbara Roper, director of investor protection for the Consumer Federation of America, said in an interview after the House vote. “We needed to avoid a sense of overwhelming bipartisan support that would have created pressure on the Senate to act.”
The Securities Industry and Financial Markets Association, a lobbying group for banks and brokerages, said in 2011 that Labor Department efforts might increase costs and limit products for investors, especially those with small balances.
“Congress must step in to ensure that federal agencies do not harm the very people they are trying to protect,” Representative Ann Wagner, a Missouri Republican who wrote the bill, said in a June statement. Representative Patrick Murphy, a Florida Democrat, is a co-sponsor on the legislation.
President Barack Obama’s advisers would recommend a veto of the bill because it would derail rulemakings “critical to protecting Americans’ hard-earned savings and preserving their retirement security,” the administration said in a statement on Monday.
The Labor Department’s proposal would change the agency’s definition of investment advice so that providers may be held to the fiduciary duty standard even if they don’t regularly make recommendations to workers. The agency has said it would provide exemptions to allow for some commission-based transactions.
Mike Trupo, a spokesman for the Labor Department, declined in an e-mail to comment on the vote.
U.S. retirement assets, not including government pensions and annuity reserves, totaled about $13.8 trillion as of June 30, with $5.7 trillion in IRAs and $5.3 trillion in defined contribution plans such as 401(k)s, according to the Investment Company Institute in Washington.
The SEC staff recommended in January 2011 that the regulator should consider imposing a fiduciary duty on brokers providing investment advice to retail customers. Under such a standard, brokers would have to disclose their conflicts of interest to customers.
An agency staff study, mandated by the 2010 Dodd-Frank Act, found many retail investors don’t understand that investment advisers and brokers operate under different legal standards for dealing with customers. Under current rules, brokers have a looser duty to recommend investments that are suitable for customers, while investment advisers have a stricter duty to put their clients’ best interests first.
The House bill requires the SEC to show that investors are being hurt under the existing standard and that the new rule would reduce investor confusion over duties of brokers versus investment advisers. Those stipulations may cause the agency to write a weaker rule that doesn’t trigger industry resistance, Roper said.
Participants with 401(k) accounts may not understand that the person educating them about their investments may have a financial stake in the choices they make, a 2011 U.S. Government Accountability Office report said. Such conflicts of interest could lead 401(k) participants who change jobs to move money to IRAs, which may have higher fees, the GAO said.
Because they are not subject to the fiduciary standard, financial services firms that administer 401(k) plans for employers may recommend funds in which they have a financial interest rather than products better suited to the investor, the report said.
In the Senate, 10 Democrats including Jon Tester of Montana and Kirsten Gillibrand of New York wrote a letter to the Office of Management and Budget in August urging a delay on the Labor Department rule until the SEC acts.
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