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Monday, February 23, 2015

Train Keep A Rollin', Part II - Now It's Fiduciary Rulemaking That's Referred to as a "Runaway Train" (with Goonies and Godfather references included at no extra charge)

In a prior post, I tried to make a pun that took me from a series of songs about trains to the five-year limitation under the 409A regs. on "track"-ing underlying equity payouts.  Well, now none other then Commissioner Gallagher has brought a train-based metaphor into the ERISA world, referring to the DOL's fiduciary rulemaking as a "runaway train."  (And, just for the record, Soul Asylum's "Runaway Train" was indeed included in my prior list of train-themed songs.)  Commissioner Gallagher's remarks were made at The SEC Speaks in 2015.  His language is colorful, to say the least, and I offer the following sampling (emphasis in original) (footnotes omitted), which even includes references to the Goonies and Godfather sequels (!!):

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[W]e've spent much of the past several years chipping away at the one hundred or so mandates imposed upon the Commission by the Dodd-Frank Act.  At last year's Speaks conference, I delivered an "open letter" to the SEC staff.  Reiterating a theme to which I’ve referred throughout my tenure as a Commissioner, I stated that the Dodd-Frank Act is "a 2,319 page monstrosity that is in substantial part untethered to the causes of the crisis."  Some have objected to this and the many related pronouncements I've made regarding the Dodd-Frank Act over the years.  To them I say:  You should have seen the first drafts!   

. . . .

Speaking of distractions and rulemaking untethered to identifiable problems, I’d like to turn now to a long-anticipated re-proposal, a sequel of sorts – but, probably more like Goonies 2 than Godfather 2.  This rulemaking is based on the premise that an entire SEC-regulated industry is plagued by conflicts of interest. . . .

. . . .

. . . And despite public reports of close coordination between the DOL and SEC staff, I believe this coordination has been nothing more than a “check the box” exercise by DOL designed to legitimize the runaway train that is their fiduciary rulemaking.  Unfortunately, this is par for the course in Washington these days - take, for example, the Financial Stability Oversight Council SIFI designation process for non-banks, where everyone's an expert except for the actual experts.  Although, as I noted, I haven't seen the DOL’s re-proposal, thanks to a White House “memo” shockingly "leaked" to the press earlier this year, I can make an educated guess at what might be included. . . .

Let’s start with some of the claims the White House memo makes.  First, the memo states that “consumer protections for investment advice in the retail and small plan markets are inadequate.”  This overarching statement is not accompanied by any analysis or study of the current protections investors receive from the regulatory oversight of brokers and investment advisers by the SEC and the SROs - in fact, it blatantly ignores this comprehensive regulatory oversight.  Indeed, the memo manages to avoid any mention of either the SEC or FINRA!

Second, the memo states that “the current regulatory environment creates perverse incentives that ultimately cost savers billions of dollars a year.”  I am not going to be drawn into a debate about the studies the memo selectively cites to support this conclusion.  But I will point out that there are SEC and SRO rules directly addressing the so-called perverse incentives referenced to in the memo. . . .

Third, the memo states that “the current regulatory environment allows fund sponsors and advisory service firms to create incentives for their advisors to recommend excessive churning . . . of retirement assets and to steer savers into higher cost products with financial payoffs for the advisor.”  Far be it from me, as a mere SEC Commissioner, to second guess the White House securities law experts, but I do feel obligated to point out that our rules expressly prohibit brokers from churning client accounts, and the SEC and SROs have sophisticated tools designed to monitor for such activity.

Finally, the memo states “academic research has clearly established that conflicts of interest affect financial advisors’ behavior and that advisors often act opportunistically to the detriment of their clients because of payments they receive from product providers.”  This statement, like the others, ignores the existence of the comprehensive oversight and disclosure regime specifically designed to address these underlying conflicts of interest.  

. . . .

To be blunt, the White House memo is thinly-veiled propaganda designed to generate support for a widely unpopular rulemaking.  Seven years after the height of the financial crisis, it is obvious that some remain intent on not letting it go to waste.  Perhaps it’s time to acknowledge a little nuance.  It’s easy to shout about conflicts of interest and vilify any potential practices that involve them, even if it means taking entire swathes of investment products off the table.  It’s a lot harder to establish a regulatory system that balances mitigating conflicts and effective disclosures with expanding investment opportunities for the good of individual investors and the economy as a whole, as the Commission has done for decades.  In a matter of this import, we should not shirk from our path simply because it is difficult.
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It's somewhat hard to embellish that, so I'll just leave it there.

(Although I will say one more thing, on a totally unrelated matter - congratulations to Birdman.)

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