State securities regulators urged the U.S. Department of Labor to defer its proposed fiduciary rules until it has proof that they would work to protect investors.
There is no data showing the Securities and Exchange Commission rules the proposal is based on will prevent the costly conflicts of interest that have been shown to harm workers and retirees, Ohio Securities Commissioner Andrea Seidt, speaking on behalf of the North American Securities Administrators Association (NASAA), told DOL officials last month during a hearing on the agency’s proposed prohibited transaction exemption.
The DOL’s proposal is designed to harmonize with Regulation Best Interest (Reg BI), a package of fiduciary rules that were put into effect by the SEC on June 30.
American workers should be given “a fighting chance to have a secure retirement future,” said Seidt, who asked that the DOL halt the proposed rulemaking until it has a factual record validating the effectiveness of the SEC’s approach.
“There is no such data at this time,” she said in testimony before the department’s Employee Benefits Security Administration. Seidt chairs NASAA’s Regulation Best Interest Implementation Committee.
She noted that NASAA is conducting a study on the effectiveness of Reg BI and it had expected to release a report by the end of September. The report is based on examinations on 2,000 broker-dealer and investment advisor firms representing more than 360,000 investment professionals and 68 million retail investment accounts.
The examinations were designed to establish a baseline of practices, including sales of complex and risky products; compensation practices, including sales contests; cost comparisons; fee disclosures; and conflict management.
Two-thirds of examined firms did not offer complex, costly and risky products such as private securities, variable annuities, non-traded REITs and leveraged or inverse-ETFs. These products are perennial sources of investor complaints, Seidt said.
However, when these products were sold, broker-dealers were twice as likely as investment advisors to recommend the purchase of leveraged and inverse ETFs, seven times as likely to recommend private placements, eight times as likely to recommend variable annuities, and nine times as likely to recommend non-traded REITs.
“It is too soon to know if Reg BI will narrow these gaps and bring B-Ds closer to fiduciary practices more aligned with customer interests. If the regulation works as intended, this is exactly what should happen,” Seidt said, noting that state securities regulators will conduct follow-up examinations next year to assess the effectiveness of Regulation BI.
“This data, along with the data that the department and others collect prospectively regarding the quality of advice offered under Reg BI, will help the department assess whether reliance on Reg BI is supported by the evidence,” Seidt said.