U.S. Labor Department unveils retirement brokers rule

Fine print, buried fees like 'chronic disease': Perez
By Sarah N. Lynch and Suzanne Barlyn
|labour-reporter.com|Last Updated: 04/14/2015

WASHINGTON (Reuters) — The U.S. Labor Department proposed sweeping changes on Tuesday that would require brokers who offer retirement advice to enter into "best interest" contracts with investors, in an effort to ensure customers are not steered into high-fee products.

Labor Secretary Tom Perez and his staff unveiled the long-awaited plan, saying new rules are needed to protect consumers who may be getting investment advice that is driven more by what will line brokers' pockets, and not by their clients' best financial needs.

"The corrosive power of fine print and buried fees can eat away like a chronic disease at peoples' savings," Perez said.

For about five years now, the Labor Department has been working to craft a workable rule to hold brokers who offer retirement account advice to a higher "fiduciary" standard.

That means they would be required to put investors' financial interests ahead of their own.

President Barack Obama threw his political muscle behind the proposal in February, saying Americans are too often the victims of hidden fees that are costing them billions of dollars each year in their retirement savings.

If ultimately adopted, the rule would have an impact on brokerages large and small, from independent shops to firms such as Fidelity, Wells Fargo, Charles Schwab and Raymond James.

Tuesday's draft contained some significant changes compared to a prior version, which the Labor Department was forced to scrap in 2011 amid widespread criticism from the industry.

A signature piece of the new draft are so-called "best interest" contracts in which brokers will be required to pledge to uphold their clients' best interests.

Such contracts must assure clients that the brokerages have policies and procedures in place to mitigate conflicts of interest.

If customers feel the contract was breached, they would be allowed to enforce it against the broker through a private right of action, such as arbitration.

The Internal Revenue Service would also be able to impose an excise tax on transactions that were based on conflicted advice.

How Wall Street may react to the plan remains to be seen.

The industry has warned that overly strict rules could limit retirement products available to investors because fewer brokerages would be prepared to offer individual retirement accounts or advise lower-income Americans on them.

The industry also fears the proposed new rules may fundamentally change the compensation structure for brokers by requiring more investors to pay fees based on a percentage of their assets instead of commissions.

That would hurt profits on such products and, as a result, brokers would pull back from offering accounts and advice, industry groups say.

The industry is also concerned about how any final rule from the Labor Department will square with another measure being developed by the Securities and Exchange Commission, which regulates all U.S. brokerages.

The SEC's plan would aim to harmonize differences in ethical standards between brokers and investment advisers. Advisers by law are already held to a high fiduciary duty, while brokers are held to a lower "suitability" standard.

The Labor Department and the SEC are governed by different laws, and while they have co-ordinated, they are each acting independently. But the two differing rules will apply to the same swath of companies, potentially complicating compliance efforts.

The industry has urged the Labor Department to take a back seat and let the SEC take the lead and issue its own fiduciary proposal first.

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