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Does Sifma's DOL Lawsuit Willfully Ignore its own Regulatory Views?

June 9, 2016

In the early 1990s, when brokers began marketing themselves as trusted financial advisors rather than salespeople, the question arose: Is the transformation real? If it is, why don’t they have the same fiduciary duty to act in the best interests of their customers that applies to all other advisors?

If it’s not, why are Finra and the SEC permitting this misrepresentation?

With final adoption of its conflict of interest rule last month, the Department of Labor came down firmly on the side of taking you at your word when you call yourselves Financial Advisors.

Accordingly, the rule imposes a legally enforceable fiduciary duty on the full range of services reasonably relied on by retirement savers as professional investment advice. Moreover, the DOL put its faith in the ability of commission- and fee-based advisors alike to act in the best interests of their customers once freed from an incentive system that too often encourages and rewards advice that is not in the customer’s best interests.

In an odd role reversal, the major broker-dealer trade associations – including Sifma, the Financial Services Institute, and the Financial Services Roundtable – have taken the other side of the argument in a lawsuit they filed last week seeking to overturn the DOL rule. According to their complaint, no one in their right mind would believe that brokers are in the business of giving advice and are thus appropriately subject to a fiduciary duty when making investment recommendations to retirement savers.

This is an argument of expediency, designed to advance the position that the DOL has greatly exceeded its authority in defining fiduciary investment advice to include all personalized investment advice, including brokers’ sales recommendations. In making their case, the industry trade associations repeatedly imply that the DOL should model its definition on the Investment Advisers Act, which excludes brokers when they provide only “incidental” advice, rather than ERISA’s statutory language, which includes no such exclusion.

Their argument is undercut by the fact that Sifma itself has said on more than one occasion that they support a best interest standard for all personalized recommendations to retail investors. Indeed, the complaint reiterates the groups’ support for rulemaking by the SEC to impose a uniform fiduciary standard for brokers and investment advisers. In other words, even as they argue for the DOL to exclude brokers’ advice from its fiduciary rulemaking, they are advocating rulemaking to eliminate that artificial distinction under the securities laws.

Sifma and its allies would have us believe this is because an SEC rule would impose a uniform standard across all accounts, in contrast to the DOL rule, which applies only to retirement accounts. But this is simply not true. While an SEC rule would cover all securities accounts it would not apply to recommendations of insurance products or of other non-securities investments. As a result, retirement investors could receive different levels of protection not just for different types of accounts but for different types of investment products sold within the same account.

Sifma and its allies know that. And even if they didn’t, the time is long past for arguments about which regulator should lead. The DOL has provided a fiduciary regulatory framework that others, including the SEC, can and should follow. Instead of turning back the clock to a time when brokers were mere salespeople, the DOL appropriately holds all “financial advisors” legally accountable for acting like the advisors they claim – and their clients expect them – to be. That’s good for retirement savers and good for the professionalism of the industry.