In Broker-Dealers, Congress, Investor Protection

On Wednesday, February 15, 2024, the House Committee on Education and the Workforce held a hearing on “Protecting American Savers and Retirees from DOL’s Regulatory Overreach” to examine the Department of Labor’s (DOL) October 31, 2023 proposed “Retirement  Security Rule” redefining who is an investment advice fiduciary under the Employee Retirement Income Security Act (“ERISA”).  The proposed rule is the latest chapter in an almost 15-year effort by the DOL to amend the five-part test in its 1975 regulation for determining whether a person is an ERISA “fiduciary” by reason of providing “investment advice” for a fee. The determination of who is a fiduciary is significant because many of the protections, duties, and liabilities of ERISA hinge on fiduciary status. Among the many Biden Administration rulemakings that policymakers are attempting to finalize before the election, the DOL’s renewed push to expand ERISA protections is viewed as far from a sure bet, partly due to the collapse of previous rulemaking attempts in the face of fierce political opposition and legal challenges.

The witnesses at the heating were:

Mr. Doug Ommen, Insurance Commissioner, Iowa Insurance Division

Mr. Thomas Roberts, Principal, Groom Law Group

Mr. Joseph C. Peiffer, President, Public Investors Advocate Bar Association (Democratic witness)

Mr. Jason Berkowitz, Chief Legal and Regulatory Affairs Officer, Insured Retirement Institute

Importantly, notwithstanding the remote but not unprecedented possibility of a final DOL rule being repealed via the Congressional Review Act, it is unlikely that Congress will directly impact the DOL’s drive to expand the definition of who is a fiduciary under ERISA. Ultimately, the DOL is likely to craft the rule it deems appropriate, and the fate of that rule will likely be determined by a federal court.  However, the Committee hearing provided an important window into the perceived strengths and weaknesses of the DOL’s proposal, and a look at which side has momentum at this stage in contest.

Supporters of the DOL proposal scored an impressive victory on the road.  The hearing was a remarkable and improbable win for proponents of the DOL rulemaking.  Despite the hearing being convened by a Republican led subcommittee, and despite three of the four witnesses at the hearing being ardently opposed to the DOL’s rulemaking, proponents of the DOL were able to make their case clearly and effectively, raising issues and arguments that Republicans were not prepared to address or effectively repute.  The enthusiasm gap between Democratic supporters and Republican opponents extended to the audience, which included a row of AARP volunteers clad in red in a show of support for the DOL.

Committee Democrats were exceptionally well primed and on-message.  Wednesday’s hearing showcased a level of enthusiasm that has not been evident since a federal appeals court struck down the DOL’s previous attempt to require professionals who provide retirement investment recommendations or solicitations to act in the best interest of their client.  It also showcased the importance of effective work by Congressional staff and outside advocacy organizations.  In this case, Democratic Committee Policy Direct Kevin McDermott, a veteran of many previous Congressional clashes over the DOL’s efforts to expand its fiduciary rules, merits a special mention.

Debate was split entirely along partisan lines.  The insurance industry has mounted a robust lobbying campaign that focuses heavily on persuading moderate, industry-friendly Democrats, that the DOL fiduciary rulemaking is not necessary or justifiable in light of the Securities and Exchange Commission’s Regulation Best Interest (Reg. BI) and the National Association of Insurance Commissioners Suitability in Annuity Transactions Model Regulation (NAIC model rule).  However, this formidable lobbying effort failed to bear any fruit whatsoever at the hearing.  Virtually all Democratic members of the Subcommittee participated in the hearing, and virtually all expressed unequivocal support and enthusiasm for the DOL’s effort.  Many Democrats – including notably Rep.  Suzanne Bonamici (D-OR) and Committee Ranking Member Bobby Scott (D-VA) – directly took aim at the shortcomings of Reg. BI and the NAIC model.  The lone possible exception was Rep. Joe Courtney (D-CT), who spoke passionately about the importance of protecting retirees, but appeared to express ambiguity about the DOL’s currently pending proposal.

Democrats focused on substance; Republicans emphasized process and cost.  In making the case in favor of the DOL rulemaking, Democrats took aim at the status quo, including notably the NAIC model rule.  They emphasized the significant changes that have occurred in the retirement savings landscape since the enactment of ERISA in the 1970s.  They also poked holes in the NAIC model – repeatedly noting that whereas the NAIC model purports to impose a best interest standard on sales of annuities to retirement plans, the NAIC model explicitly exempts compensation from being considered in relation to this standard, despite its being the most obvious source of conflicted advice.

Republican arguments against the DOL rulemaking centered on the issue of process and cost.  From a procedural standpoint, Republicans emphasized that in proposing the rule, the DOL has effectively changed its position “three times in three years.”  They asserted that the “DOL has overstepped its authority,” and that “the rule is clearly outside the purview of the agency.”  Republicans also pointed out the debate over the question of fiduciary requirements to retirement assets has been ongoing since 2010.  Finally, Republicans predictably leaned into the industry’s favorite and most politically potent argument – that the application of a fiduciary duty would deprive “middle class workers” of access to retirement planning.

Republicans linked the DOL’s 2023 proposal to the DOL’s 2016 Obama Administration rule, while Democrats sought to cast the 2023 as different, “narrow” and “tailored.”  From the outset of the hearing, Committee Democrats sought to distance the pending DOL rule proposal from previous (failed) DOL rulemaking efforts in 2010 and 2016.  In his opening statement, Subcommittee Ranking Democratic Member Mark DeSaulnier stayed relentlessly on message, characterizing the pending DOL proposal as “a common sense, narrowly defined, and narrowly tailored rule that is aligned with the current ‘do it yourself’ retirement savings landscape.”  By contrast, Republicans took every opportunity to discuss “past versions” of the DOL fiduciary rule, which they argued “created massive headaches for the retirement products and services industry,” and forcing brokerages “to eliminate or limit brokerage advice” services as a result.

The NAIC Model Rule failed to provide the desired political cover to opponents of the DOL.   Neither Democrats nor Republicans expressed much enthusiasm for or confidence in the NAIC’s model rule, which has to date been adopted by 42 states.  Both sides seemed to concede that the NAIC model was significantly weaker than the DOL proposal from an investor protection standpoint.

Peiffer was an extraordinarily effective witness for the Minority.  Fundamentally, the hearing was a debate over whether persons that sell annuities to a retirement plan should be required to act in the “best interest” or “solely in the best interest” of the purchaser.  To give meaning and life to this legal distinction, Democrats selected Peiffer, a plaintiff’s attorney, and the current president of the Public Investors Advocate Bar Association (PIABA). Drawing on his decades of experience as a practitioner, and detailed knowledge of ERISA, Pfeiffer was able to put a compelling face on the investor protection gap.

Peiffer’s testimony was replete with examples of investors whose “retirement nest egg was cracked open by their advisor for commissions leaving them with nothing.”  He told the Subcommittee about clients “did not have gas money to drive the three hours round trip to the trial against the advisor and his firm…and so stayed with me in my 1,000 square foot apartment…and I’d listen to them beat themselves up for trusting someone that they thought was a professional like a doctor or a lawyer.”  He discussed another case involving chemical and refinery plant workers – “Good, solid men and women, who were hard-working, remarkable Americans” – who ran out of retirement savings because their “advisor put them into high-cost insurance and mutual fund products that paid him on average about $50,000.”  He explained that the problem was the current rules didn’t protect investors.  “The fact of the matter is that these folks did the right thing. They went to an advisor, who held himself out as an expert and told them that he had their best interest at heart. Their advisor did not. And when called to account for his behavior, their advisor argued he had no duty to put their interest in a long and happy retirement ahead of his interest in making huge commissions.”  It was in the context of these real-life examples that Pfieffer framed his argument that “Retirees and potential retirees deserve nothing less than a rule that requires advisors to give unconflicted advice.”  It was an effective and energizing performance.

Democrats effectively defanged industry-funded “studies” that undermine DOL rulemaking goals.  Arguably the most compelling exchange of the hearing occurred when Rep. Susan Wild (D-PA) raised the question of industry fund research and studies with Democratic witness Joe Peiffer in an effort to systemically discredit their findings and conclusions.  This effort was highly successful.

Rep. Wild:

We continue to hear about these studies or surveys that have been done and I think it’s really important for people listening to understand that these are not neutral or objective studies.  They are generally done by large trade associations representing brokers and traders.  These are not studies that are done by let’s say AARP or other groups that represent retired citizens.  These are literally lobbying organizations for folks who make money on this and there’s nothing wrong with making money we know that in this country, but it’s wrong to make money at the expense of somebody else in my view.

Mr. Peiffer, for you presented some compelling real-world examples of people who’ve been harmed by the status quo I’m particularly concerned about the small dollar investors you just pick up at that point and tell us what the ramifications are for people who are not born to wealth or born with a silver spoon in their mouth?

Joe Peiffer:

Absolutely.  Small savers are the most susceptible to conflicted advice.  They can least afford to have conflicted advice.  You hear about the studies – I’m glad you brought that up because you hear about study after study and they’re all industry funded studies.  None of them are statistically significant, random samples, or anything along those lines.  What we do know is what happened after the last DOL rule, when industry came in here and all over the place saying that the sky would fall, and no one would be able to get advice.  Well that the financial professionals would lose money, well they wouldn’t be able to serve small savers – but that turned out to be true stop for one second.

Rep. Wild:

I’m really sorry to do this but I think it’s important for people to know that the studies for instance the Securities Industry and Financial Markets Association (SIFMA) one that says it was published by Deloitte wasn’t written by Deloitte they didn’t verify validate or audit the information.  They were simply the conduit for broker at broker dealer trade association to prepare this report.  They were Scribners.  And same thing with the 2021 Hispanic leadership fund study.  By the way, that one actually not only was done by a group of people in the profession but it doesn’t even apply to the DOL. The NAIFA and the [2024] FSI Oxford survey – all of them were done by trade associations for brokers and dealers.  And that’s what’s been relied upon by the other witnesses in this hearing and by my colleagues across the aisle to justify trying to defeat the DOL rule.





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