Democratic Leaders Call for GAO Review of Fiduciary Landscape

According to Democratic leaders in Congress, the Department of Labor appears to be doing little, if anything, to inform consumers about conflicts of interest in the advisory and brokerage industries.  

An open letter penned by Congressional Democrats and addressed to Gene Dodaro, Comptroller General U.S. Government Accountability Office (GAO), calls on the GAO to examine the broad public and industry response to the 2018 defeat in a federal appeals court of the Department of Labor’s (DOL) fiduciary rule expansion.

The twin Democratic signatories of the letter are Virginia Representative Robert Scott, Chairman of the House Committee on Education & Labor, and Washington Senator Patty Murray, Ranking Member of the Senate Committee on Health, Education, Labor & Pensions.

“In the past year [since the fiduciary rule’s court defeat], DOL appears to have done little, if anything, to warn retirement savers that they are now vulnerable to professionals who, according to DOL, have no obligation to put their clients’ interest before their own,” they write.

According to the Congressional Democratic leaders, understanding the fiduciary rule expansion’s significance and the likelihood that it would soon be operational, many financial services firms took considerable action in recent years to comply in advance.

“Some firms believed that the rule included many commonsense changes that were long overdue, particularly with regard to the provision of investment advice. These firms revised their operations significantly, in some cases spending millions of dollars,” the letter states. “After being upheld a number of times in various courts, the U.S. Court of Appeals for the Fifth Circuit unexpectedly vacated the DOL’s rule in 2018, creating uncertainty and confusion for the financial services industry and the retirement world generally. Today, plan sponsors, financial services professionals, and investment advisers must decide whether to retain the new policies and procedures they developed, often at considerable expense, in response to the fiduciary rule.”

According to Murray and Scott, one “unclear alternative was to revert to the pre-2016 ways of doing business, restoring harmful conflicts of interest that had previously been eliminated to comply with the 2016 rule.”

“Additionally, the Securities and Exchange Commission (SEC) recently promulgated a rule covering investment advice in the retail market,” the letter continues. “While the SEC rule does not immediately implicate retirement plans, Secretary of Labor Alexander Acosta has indicated that DOL will collaborate with the SEC to issue a new fiduciary rule later this year, which may exacerbate the confusion. Meanwhile, plan participants may experience difficulty in understanding the various duties owed to them by those giving retirement advice and may be receiving conflicted advice.”

In light of these challenges, the Congressional Democrats are urging the GAO to address the following questions:

  • To what degree did financial services firms, plan administrators and financial advisers serving defined contribution plans, 401 (k) plan participants, and IRA investors assume a fiduciary role in response to the 2016 Rule?
  • For those firms that initiated efforts to comply with the 2016 rule prior to the Fifth Circuit’s decision, how did their product line change during this period (i.e., what new products, if any, were introduced and which products were de-emphasized to facilitate compliance, particularly with the 2016 rule’s Best Interest Contract exemption)?
  • How did their compensation structure (e.g., commission fee for service) of advisers and other staff change during this period?
  • How did the amount of sales and revenue by product type change during this period?
  • What were their aggregate compliance costs, and how did these costs vary by type (e.g., technology or training product development among other things)?
  • What was the overall effect on plans, participants, and IRA investors?
  • To what extent have those entities who assumed a fiduciary role continued to act as fiduciaries after the rule was vacated in 2018? And to what extent have those entities who assumed a fiduciary role decided not to act as fiduciaries after the rule was vacated? Why did these entities choose their specific path?
  • For the entities who continued to assume a fiduciary role after the rule was vacated and those that did not, to what extent, if any, has the rule being vacated affected their product line; the amount of sales and revenue for by product type; compensation structure; and their aggregate compliance costs, and costs by type.
  • To what extent will the SEC’s Regulation Best Interest, which was finalized on June 5, 2019, cover advice to retirement savers and what protections will it extend to retirement savers and plan participants generally? Which retirement products will be subject to the SEC’s rulemaking?