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Executive Summary of FSI’s Comment Letter on DOL Fiduciary Proposal

Financial Services Institute / Executive Summary of FSI’s Comment Letter on DOL Fiduciary Proposal

Executive Summary of FSI’s Comment Letter on DOL Fiduciary Proposal

FSI stands ready and willing to work with the Department and others toward achieving the goal of enhancing investor protection while ensuring access by all to affordable retirement advice, products, and services. FSI offers the following executive summary of the comments and issues raised in this comment letter. Select a title item below to view the summary of each topic:

Public Policy Context and Adverse Impacts of Department’s Proposal

o   FSI Supports a Uniform Fiduciary Standard: Since 2009, FSI
has supported a uniform fiduciary standard of care applicable to all
professionals providing personalized investment advice to retail clients.
Consistent with the Department’s intent, this standard of care would require
financial advisors to act in the best interest of their clients.

o   Barrier to Uniform Fiduciary Standard: The Proposal
would be a barrier to a uniform fiduciary standard of care that could apply to
all investment advice professionals for all retail accounts.

o   Adds Regulatory Complexity: The Proposal
will add complexity to an already complicated regulatory environment for
broker-dealers, investment advisers, financial advisors, and investors. It
overlays the existing regime with an intricate regulatory framework that will
raise new barriers to the availability of professional investment services for
millions of Americans.

o   Exponential Increase in Number of Standards: The Proposal
would require investors to transition from understanding two standards of care
to understanding six different standards of care.

o   Reduces Access: The Proposal
would reduce access to retirement advice and services for low and middle-income
investors by favoring passive investment “robo-advice” over
professional and personalized investment guidance. The Proposal would also
establish road blocks that prevent or deter financial advisors from offering
their services to small businesses seeking to create retirement accounts for
their employees.

o   U.K. RDR: The United Kingdom’s experience with
Retail Distribution Review foreshadows the negative impact that the Proposal
will have on small accounts in the U.S.

Carve-Outs from the Definition of Fiduciary Investment Advice Need Expansion

o   Counterparty Carve-Out: The
Counterparty Carve-out should be expanded to cover advice paid for through plan
assets, and should cover plans of any size. All plan fiduciaries are required
to have or obtain the type of financial expertise that the Department uses to
justify the “large-plan” carve out.

o   Education Carve-Out: The Education
Carve-out must preserve investor access to meaningful investment education. The
Proposal’s changes precluding identification of specific investment
alternatives will deny investors access to helpful information that greatly
benefits their investing experience.

o   Platform Carve-Outs: The Platform
Provider/Selection and Monitoring Assistance Carve-outs should be expanded to
cover IRA platforms. IRA owners are fully capable of understanding that a
provider’s standardized IRA platform is not individualized to the needs of the
IRA owner.

The Department’s Regulatory Impact Analysis is Incomplete

o   Speculative Data: The Department’s Regulatory Impact Analysis contains data that is speculative, difficult to measure and far afield of solid empirical data gathered by
independent experts.

o   Unaccounted Costs: The analysis fails to take into account the costs to retirement savers who would not be in the system without access to financial advice and are well served by advisors who work with them on a commission basis.

o   Underestimates Compliance Costs: The compliance costs outlined in the analysis are significantly understated. Based on FSI research, the costs will be several multiples higher than the Department’s estimates.

BICE Requires Significant Changes to Ensure Investors Have Access to Personalized Retirement Advice

o   Written Contract Requirement: The Best Interest Contract Exemption (BICE) written
contract requirement is inconsistent with customary practices in the financial
services industry and reasonable investor expectations. FSI encourages the
Department to reconsider the BICE pre-advice, pre-transaction contract
requirement.

 o   Private Right of Action: The creation of a
new private right of action appears to be beyond the scope of the Department’s
delegated authority. The BICE private right of action displaces SEC and FINRA
authority over industry enforcement and investor disputes.

o   Definition of Asset: The BICE
definition of “Asset” hinders best interest advice by impeding diversification
in retirement accounts and exposing investors to greater risk. FSI proposes a
broader definition of “Asset” to ensure financial advisors can recommend the
best investments for a client’s specific needs.

o   IRA Rollovers: The unclear
application of the many BICE requirements to IRA rollover advice creates
uncertainty that will jeopardize retirement savings. FSI urges the Department
to clearly state that rollover advice is eligible for protection under BICE,
requiring advisors to meet a best interest standard.

o   Levelized Compensation: The BICE
restrictions on compensation are duplicative and do not serve investor
interests. Levelized fee arrangements would make access to financial advice
cost-prohibitive for small investors.

o   Compliance Costs: The BICE exposes
financial institutions to a myriad of compliance costs and added liability
risks that render the exemption unusable in its current form.

o   Operational Difficulties: The BICE
disclosure requirements will require access to third-party information and
massive overhauls of administrative systems thereby increasing costs
substantially.

o   Grandfathering Provision: The BICE
grandfathering provision is ineffective and should be expanded to account for
customary client maintenance procedures.

The Proposal’s Prohibited Transaction Class Exemption for Debt Securities Transactions Effected on a Principal Basis is Inadequate

o   Riskless
Principal Trades
:
Riskless principal trades are the functional equivalent of agency transactions
and should be excluded from the PTE.

o   Operational
Difficulties
: The
separate contract requirements, confirmation mark-up disclosure requirements
and pricing requirements are all costly and very challenging to implement.

o   Investor
Confusion
: The
multiple disclosures will not provide sufficient context and education to be useful
for investors.

PTE 84-24 Will Reduce Access

o   Restricts Access: The
amendments to the proposal’s Prohibited Transaction Class Exemption (PTE) 84-24 will require many firms to discontinue relationships
that have traditionally relied on the protections of PTE 84-24, thereby
reducing access to professional advice.

o   Lack
of Clarity
:
Uncertainty regarding the definition of “insurance commission” clouds the
compliance landscape and exposes the industry to liability risks many financial
advisors will be unwilling or unable to assume.

Proposal Requires Longer Implementation Period

o   Applicability
Date
: Our
members will need, at minimum, 36 months to put the Proposal into place,
assuming that the Department eliminates many of the BICE disclosures, adopts a
conventional grandfathering rule, and that many of the existing prohibited
transaction class exemptions are preserved in current form. If the Department
does not make these changes to BICE, our members require additional time to
achieve compliance.

FSI Proposes Workable Alternative

o   Uniform
Fiduciary Standard
: We
support a fiduciary standard of care that can be adopted uniformly across all
types of investment accounts and can apply to all investment professionals.

o
Compensation Governance: We support requiring policies and procedures
reasonably designed to manage material conflicts of interest.

o   Robust
Disclosures
: We suggest
a comprehensive two-tiered disclosure regime, supplemented by a point-of-sale
disclosure and an annual disclosure.

o
Interagency Coordination: The alternative should be produced through
coordination between the Department, SEC, FINRA and state securities
regulators.

Public Policy Context and Adverse Impacts of Department’s Proposal

o   FSI Supports a Uniform Fiduciary Standard: Since 2009, FSI
has supported a uniform fiduciary standard of care applicable to all
professionals providing personalized investment advice to retail clients.
Consistent with the Department’s intent, this standard of care would require
financial advisors to act in the best interest of their clients.

o   Barrier to Uniform Fiduciary Standard: The Proposal
would be a barrier to a uniform fiduciary standard of care that could apply to
all investment advice professionals for all retail accounts.

o   Adds Regulatory Complexity: The Proposal
will add complexity to an already complicated regulatory environment for
broker-dealers, investment advisers, financial advisors, and investors. It
overlays the existing regime with an intricate regulatory framework that will
raise new barriers to the availability of professional investment services for
millions of Americans.

o   Exponential Increase in Number of Standards: The Proposal
would require investors to transition from understanding two standards of care
to understanding six different standards of care.

o   Reduces Access: The Proposal
would reduce access to retirement advice and services for low and middle-income
investors by favoring passive investment “robo-advice” over
professional and personalized investment guidance. The Proposal would also
establish road blocks that prevent or deter financial advisors from offering
their services to small businesses seeking to create retirement accounts for
their employees.

o   U.K. RDR: The United Kingdom’s experience with
Retail Distribution Review foreshadows the negative impact that the Proposal
will have on small accounts in the U.S.

Carve-Outs from the Definition of Fiduciary Investment Advice Need Expansion

o   Counterparty Carve-Out: The
Counterparty Carve-out should be expanded to cover advice paid for through plan
assets, and should cover plans of any size. All plan fiduciaries are required
to have or obtain the type of financial expertise that the Department uses to
justify the “large-plan” carve out.

o   Education Carve-Out: The Education
Carve-out must preserve investor access to meaningful investment education. The
Proposal’s changes precluding identification of specific investment
alternatives will deny investors access to helpful information that greatly
benefits their investing experience.

o   Platform Carve-Outs: The Platform
Provider/Selection and Monitoring Assistance Carve-outs should be expanded to
cover IRA platforms. IRA owners are fully capable of understanding that a
provider’s standardized IRA platform is not individualized to the needs of the
IRA owner.

The Department’s Regulatory Impact Analysis is Incomplete

o   Speculative Data: The Department’s Regulatory Impact Analysis contains data that is speculative, difficult to measure and far afield of solid empirical data gathered by
independent experts.

o   Unaccounted Costs: The analysis fails to take into account the costs to retirement savers who would not be in the system without access to financial advice and are well served by advisors who work with them on a commission basis.

o   Underestimates Compliance Costs: The compliance costs outlined in the analysis are significantly understated. Based on FSI research, the costs will be several multiples higher than the Department’s estimates.

BICE Requires Significant Changes to Ensure Investors Have Access to Personalized Retirement Advice

o   Written Contract Requirement: The Best Interest Contract Exemption (BICE) written
contract requirement is inconsistent with customary practices in the financial
services industry and reasonable investor expectations. FSI encourages the
Department to reconsider the BICE pre-advice, pre-transaction contract
requirement.

 o   Private Right of Action: The creation of a
new private right of action appears to be beyond the scope of the Department’s
delegated authority. The BICE private right of action displaces SEC and FINRA
authority over industry enforcement and investor disputes.

o   Definition of Asset: The BICE
definition of “Asset” hinders best interest advice by impeding diversification
in retirement accounts and exposing investors to greater risk. FSI proposes a
broader definition of “Asset” to ensure financial advisors can recommend the
best investments for a client’s specific needs.

o   IRA Rollovers: The unclear
application of the many BICE requirements to IRA rollover advice creates
uncertainty that will jeopardize retirement savings. FSI urges the Department
to clearly state that rollover advice is eligible for protection under BICE,
requiring advisors to meet a best interest standard.

o   Levelized Compensation: The BICE
restrictions on compensation are duplicative and do not serve investor
interests. Levelized fee arrangements would make access to financial advice
cost-prohibitive for small investors.

o   Compliance Costs: The BICE exposes
financial institutions to a myriad of compliance costs and added liability
risks that render the exemption unusable in its current form.

o   Operational Difficulties: The BICE
disclosure requirements will require access to third-party information and
massive overhauls of administrative systems thereby increasing costs
substantially.

o   Grandfathering Provision: The BICE
grandfathering provision is ineffective and should be expanded to account for
customary client maintenance procedures.

The Proposal’s Prohibited Transaction Class Exemption for Debt Securities Transactions Effected on a Principal Basis is Inadequate

o   Riskless
Principal Trades
:
Riskless principal trades are the functional equivalent of agency transactions
and should be excluded from the PTE.

o   Operational
Difficulties
: The
separate contract requirements, confirmation mark-up disclosure requirements
and pricing requirements are all costly and very challenging to implement.

o   Investor
Confusion
: The
multiple disclosures will not provide sufficient context and education to be useful
for investors.

PTE 84-24 Will Reduce Access

o   Restricts Access: The
amendments to the proposal’s Prohibited Transaction Class Exemption (PTE) 84-24 will require many firms to discontinue relationships
that have traditionally relied on the protections of PTE 84-24, thereby
reducing access to professional advice.

o   Lack
of Clarity
:
Uncertainty regarding the definition of “insurance commission” clouds the
compliance landscape and exposes the industry to liability risks many financial
advisors will be unwilling or unable to assume.

Proposal Requires Longer Implementation Period

o   Applicability
Date
: Our
members will need, at minimum, 36 months to put the Proposal into place,
assuming that the Department eliminates many of the BICE disclosures, adopts a
conventional grandfathering rule, and that many of the existing prohibited
transaction class exemptions are preserved in current form. If the Department
does not make these changes to BICE, our members require additional time to
achieve compliance.

FSI Proposes Workable Alternative

o   Uniform
Fiduciary Standard
: We
support a fiduciary standard of care that can be adopted uniformly across all
types of investment accounts and can apply to all investment professionals.

o
Compensation Governance: We support requiring policies and procedures
reasonably designed to manage material conflicts of interest.

o   Robust
Disclosures
: We suggest
a comprehensive two-tiered disclosure regime, supplemented by a point-of-sale
disclosure and an annual disclosure.

o
Interagency Coordination: The alternative should be produced through
coordination between the Department, SEC, FINRA and state securities
regulators.

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