The (Financial) Empires Strike Back

the financial empire strikes back

Initiatives to provide participants with protection from conflicted service models frequently meet with resistance from…the financial industry. What can employers do?

The past few years have seen a variety of government initiatives aimed at protecting retirement plan participants from conflicted advice and (occasionally) deceptive sales practices.

This list of initiatives is long, and includes the Department of Labor’s proposed redefinition (and expansion) of who is an ERISA fiduciary, the more recent Securities and Exchange Commission proposal to require that brokers act in customers’ “best interest” and a host of initiatives to implement participant protection at the state level (including state-based fiduciary standards in New York, New Jersey, Nevada and Connecticut).

These initiatives take a number of different approaches to the problem of conflicted sales structures. For example, the new SEC proposal impacts all brokers/registered representatives (and not just those selling financial products and services to retirement plan participants), New York is focused on annuity sales, and Connecticut is focused on sales to public employees’ 403(b) plans.

Stymying Regulatory Activity

But, these initiatives have one thing in common: they are fiercely resisted by the financial services industry. Several industry groups (including the Financial Services Institute, the Insured Retirement Institute, and the Securities Industry and Financial Markets Association) acted as named plaintiffs in the lawsuit that ultimately derailed the DOL’s fiduciary proposal. And some of these same industry groups are now opposing state-based initiatives aimed at filling the void left by the demise of the DOL’s fiduciary proposal.

For example, the Securities Industry and Financial Markets Association (SIFMA) has provided testimony regarding the Nevada fiduciary standard, urging Nevada regulators to utilize the existing FINRA “suitability” standard and to avoid creating “confusion” among consumers and financial professionals. More recently, the president of SIFMA recently cautioned state regulators against issuing state-based rules to protect participants. As one headline put it, the message was “Get Your Hands Off Fiduciary Rules, Sifma Warns States“.

There may be perfectly valid public policy arguments for financial firms to oppose rules that create undue regulatory burdens on the industry. On the other hand, one can be forgiven for suspecting that the industry’s opposition to higher professional standards (and more consumer protection) is driven by the fact that industry revenue and greater participant protections are a “zero sum game” — gains achieved by retirement plan participants in the form of lower fees represent decreasing revenue for the industry.

Of course, industry groups cannot universally oppose all consumer protections; that would be too obvious. Instead, industry groups have sought to focus consumer protections with the SEC (rather than the Department of Labor or individual states), as the agency most concerned with the consequences of regulatory actions on the financial industry’s income and, therefore, the agency least likely to disrupt the financial industry’s current revenue model. This approach can be seen in SIFMA’s comment letter to the SEC regarding the SEC’s proposal: SIFMA supports the SEC’s proposal, but is urging changes (such as reducing the disclosure required regarding conflicts of interest) that serve to dilute the consumer protections contained in the SEC proposal.

In effect, the financial industry supports initiatives that can be labeled as consumer protections, as long as there is not too much protection actually occurring. Indeed, a recent article in Investment News on the SEC’s “best interest” (or BI) proposal noted that:

Dale Brown, president and chief executive of the Financial Services Institute, said the centerpiece of the SEC proposal, so-called Regulation Best Interest, which would require brokers to act in the best interests of their clients, would make a modest impact.

“Is Reg BI as proposed a substantial improvement over the current suitability standard? No. It’s not,” Mr. Brown said at the MarketCounsel Summit in Las Vegas. “I think it’s probably what Chairman Clayton feels that he can get at least two other … commissioners on the SEC to agree to.”

Enter Employers

The Department of Labor first issued the proposed redefinition of the term “fiduciary” in 2010. Eight years later, we are no closer to meaningful regulatory limitations on conflicted service models. In the absence of substantive new protections from regulators, employers must come to understand limits on the protections that will come from regulators and the importance of employer initiatives.

Regulatory agencies can provide some protection for plan participants through disclosure requirements and enforcement — but regulators are constrained and cannot be in all places at all times. Rather, employers must understand that they are in the best position to participants and negotiate contracts with plan providers that contain meaningful protections against conflicted service models. Employers have the ability to force vendors to limit activities geared at promoting non-plan financial services and products, to identify vendor compensation practices that create a conflicted service model, and to provide participants with the tools needed to make informed decisions about purchasing such non-plan financial services and products.

The Wizard of Oz explained to Dorothy that, rather than looking for help elsewhere, she already had the power to return to Kansas but she just did not realize it. Obtaining greater participant protections against conflicted service models is the same–employers have the power to achieve these goals, if they realize they have this power and choose to use it.