A wide group of investor attorneys, investor advocacy groups and employee organizations told the Department of Labor yesterday in a letter that they “strongly oppose” the agency’s advice rule and believe it leaves retirement investors “dangerously exposed to conflicted advice.”

The letter, titled “How to Fix the Advice Rule,” was sent to DOL Acting Assistant Secretary Ali Khawar and asks for sweeping changes to the prohibited transaction exemption called “Improving Investment Advice for Workers & Retirees,” or PTE 2020-02, that the agency approved in February. The five-part exemption is designed to allow fiduciary advisors to accept commissions and other compensation normally prohibited to them without triggering ERISA violations.

“Research continues to show that investors still need regulatory protections that more effectively rein in conflicts of interest. Unfortunately, regulators at the Securities and Exchange Commission and in state insurance departments have thus far been unwilling to take consequential steps to rein in harmful incentives,” more than 40 groups and individuals, including the Consumer Federation of America, the Public Investors Arbitration Bar Association and long-time fiduciary advocate Ron A. Rhoades, director of the Personal Financial Planning Program at Western Kentucky University, wrote.

The groups are asking the DOL to make the following changes to the rule:

• Clarify the meaning of “best interest.”
• Close remaining loopholes in the definition of fiduciary investment advice.
• Strengthen the core duty of loyalty.
• Impose a duty to monitor on firms.
• Strengthen the disclosure requirements through testing and improved timing.
• Eliminate the self-correction provision for firms that discover violations and make investors whole.
• Strengthen advice rules with regard to IRA investors.

In creating a more concrete “best-interest” definition, the groups want the DOL to use the standard that was overturned in court from it’s 2016 fiduciary rule and said that currently the DOL’s guidance includes only a limited discussion of how the agency plans to interpret the standard. “It notes merely that, under this standard, the advice must be based on the interests of the customer, rather than the competing financial interest of the investment professional or financial institution,” the letter said.

The one concrete example provided—“that in choosing between two investments equally available to the investor, it is not permissible for the investment professional to advise investing in the one that is worse for the retirement investor because it is better for the investment professional’s or the financial institution’s bottom line”—is helpful, but more is needed, the groups said.

As evidence of the role that conflicted compensation plays in harming investors, they referenced a 2020 Harvard and New York University study on variable annuities sales that documented the influence that compensation conflicts have on recommendations and the harm to investors that results.

“Researchers found that brokers earn higher commissions for selling ‘inferior annuities, in terms of higher expenses and more ex-post complaints’ and that ‘variable annuity sales are roughly five times more sensitive to brokers’ financial interests than investors,” the groups wrote.

The study also found that the now-defunct DOL fiduciary rule curbed significant conflicts, “driving down the sales of high-expense variable annuities ... as sales became more sensitive to expenses and insurers increased the relative availability of low-expense products,” the groups said.

The DOL indicated in April that its current rule may be just placeholder for broker-dealers, insurers, variable annuities companies and sales professional while the agency re-examines rollover advice. Future actions may include “amending or revoking some of the other existing class exemptions available to investment advice fiduciaries,” the DOL said.

“We believe such continued efforts are needed to close legal loopholes that would otherwise enable firms to evade appropriate application of the fiduciary duty,” the groups said.

They also credited the agency with identifying specific practices that could harm retirement investors and telling firms they must work to avoid practices such as paying incentives and using quotas, bonuses, prizes and performance standards, which can undermine compliance with the best interest standard.

“We ask that the department consider identifying other problematic compensation structures, as well, such as forgivable loans and deferred compensation plans that are tied to expectations that the investment professional meet certain production thresholds," the letter said.

The groups also asked that DOL step up its call for firms to increase monitoring of certain investments that are prone to conflicts of interest, such as proprietary products and principal-traded assets and complex investments.