The U.S. Department of Labor (DOL) has finalized a controversial rule designed to raise conduct standards on financial advisors who provide retirement advice.
The final rule, which revises the definition of an investment advice fiduciary under the Employee Retirement Income Security Act (ERISA), requires advisors to provide investment recommendations that meet high standards of care and prioritize investors’ interests.
Firms that oversee advisors are also required to have policies and procedures in place that manage conflicts of interest and ensure that their reps adhere to the fiduciary standard.
“This rule protects the retirement investors from improper investment recommendations and harmful conflicts of interest. Retirement investors can now trust that their investment advice provider is working in their best interest and helping to make unbiased decisions,” said acting Secretary of Labor Julie Su in a release.
The new rule, which takes effect on Sept. 23, applies when advisors give compensated investment advice to retirement plan participants, individual retirement account owners and officials responsible for administering retirement plans and managing their assets.
The DOL said the rule will also ensure that advisors can compete on a level playing field, instead of under a system of disparate standards based on the types of products being recommended.
The agency’s effort to raise conduct standards in the industry started with a rule proposal back in 2016, which fell to a legal challenge in 2018. In 2020, the U.S. Securities and Exchange Commission (SEC) undertook its own effort to raise standards on advisors with the adoption of Regulation Best Interest (Reg BI).
The DOL said it is coordinating with the SEC, the U.S. Treasury Department, and the IRS, to ensure that its new rule aligns with the Reg BI requirements.
The new rule was applauded by a group of lawyers that frequently represents harmed investors, the Public Investors Advocate Bar Association (PIABA), which noted that research has found that investment recommendations driven by advisors’ financial interests, costs investors over US$17 billion a year.
“We’re going to be hearing from Wall Street and the insurance industry that the sky is falling and that their businesses are in jeopardy. That couldn’t be farther from the truth. Financial advisors are not going to go extinct,” said Joseph Peiffer, president of the PIABA, and founding partner of the law firm, Peiffer Wolf Carr Kane Conway & Wise, in a release.
“In fact, advisors already benefit from the widespread public perception that it’s their job to act in their clients’ best interests. Franky, it’s an insult to the intelligence of hard-working Americans when advisors claim their jobs are threatened by the prospect of providing the unconflicted advice they know their clients already expect,” he added.
“PIABA strongly urges Congress to reject the inevitable industry efforts to block this rule to perpetuate its multibillion-dollar cash grab from unsuspecting families,” he said.
Industry lobby group, the U.S. Securities Industry and Financial Markets Association (SIFMA) said it would closely review the final rule.
“As proposed, the rule conflicted with existing federal securities regulation — specifically [Reg BI] — and would likely limit investors’ access to advice and education,” said Kenneth Bentsen, Jr., president and CEO of SIFMA, in a release.
“Stakeholders have been quite explicit on the need to address these conflicts and we will be reviewing the conflict-related text as well as other relevant text on the material flaws we raised in our comments,” he said.
Fund industry trade group, the Investment Company Institute (ICI), said it is closely reviewing the final rule as well.
“We have always strongly supported the principle that financial professionals should act in their clients’ best interests when offering personalized recommendations, as the SEC’s Regulation Best Interest for broker-dealers already requires,” said ICI president and CEO Eric Pan in a statement.
“We will examine the rule in detail to see how the DOL has responded to the hundreds of comment letters it received providing detailed public input on the proposal,” he added.