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 The rule, announced by the Department of Labor on Wednesday, sets a
so-called fiduciary standard for financial brokers who sell
retirement products, requiring them to put clients' best interests
ahead of their bottom line. The language is tougher than an existing
rule that only requires brokers to ensure products are "suitable."
However, the Labor Department did compromise with the industry on a
range of provisions. Unlike the draft proposal, the final rule does
not restrict brokers from pushing proprietary products, splitting
revenue with creators of funds they promote, or recommending risky,
high-fee investments in alternative assets and certain annuities.
Brokers also got more time to implement the changes, which they said
were costly and difficult. The rule will now take full effect on
Jan. 1, 2018, compared with an eight-month compliance deadline in
the Labor Department's initial proposal.
Nonetheless, brokers will now be covered by a fiduciary standard,
said Massachusetts Senator Elizabeth Warren, a consumer advocate who
helped shine a national spotlight on the proposal last year.
"There's no doubt there is some risk," Warren, a Democrat, said in
an interview. "On the other hand, the Department of Labor was not
looking to put all proprietary products out of business," Warren
said.
The goal is to make sure there is "adequate regulation," said
Warren, adding that she now believes there will be.
Democratic presidential front-runner Hillary Clinton issued a
statement in support of the new rule, saying it will "stop Wall
Street from ripping off families" and "save seniors billions."
However, Knut Rostad, an investor advocate who chairs the Institute
for the Fiduciary Standard, said he was disappointed that the final
rule was not tougher, calling it "a major defeat for investors,
period."
Some leading Republican lawmakers also expressed continued
opposition to the rule, saying it would prevent low- and
middle-income Americans from saving for retirement or getting access
to advice.
Several major brokerage firms said they needed time to review the
implications, but that they generally supported the idea of a "best
interest" rule. Industry trade groups reiterated concerns that the
rule could have negative effects.
But several Wall Street analysts who cover brokerages, insurers and
mutual fund companies affected by the rule said it turned out to be
much less onerous than initially feared. Shares of brokerage, mutual
fund and life insurance companies showed little reaction to the
news.
The Labor Department "meaningfully softened" the rule, Morgan
Stanley insurance analysts said, characterizing it as "good news for
those companies impacted."
Wednesday's announcement caps a fierce, six-year battle involving
the Labor Department, Wall Street and many U.S. lawmakers.
The Department received more than 3,000 letters about the rule and
took part in more than 100 meetings. It first issued a proposal in
2010 but rescinded it the following year in response to an enormous
industry backlash. A second proposal issued last year also faced
criticism.
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Firms have said the rule would raise compliance costs, and therefore
fees, and force them to get rid of Main Street clients and small
businesses that offer 401(k) plans.
The Labor Department said complying with the rule would cost the
brokerage industry up to $31.5 billion over the next decade but
produce even bigger gains for investors.
Some lawmakers said the Labor Department should hold off until the
U.S. Securities and Exchange Commission finalizes its own fiduciary
rule, which it has been crafting for years. SEC Commissioner Michael
Piwowar expressed opposition to the final rule on Wednesday.
PRIORITY FOR OBAMA
President Barack Obama had made a new fiduciary rule a priority for
his administration. In a speech at AARP headquarters last year, he
said Wall Street brokers were bilking retirees out of billions of
dollars in savings through hidden fees and that he intended to
ensure the industry put clients' interests first.
"If expecting retirement advisers to act in their clients' best
interest sounds like it's pretty obvious – and it's pretty obviously
the right thing to do – it's because it is," Jeff Zients, director
of the White House's National Economic Council, said in a call with
reporters.
Although the final rule did include the best-interest provision, it
made plenty of concessions.
For example, the draft listed types of assets that advisers could
recommend to steer retail investors away from certain high-risk
products. The final version eliminates that list, mostly in response
to the financial industry's concerns, the Labor Department said.
Brokerages and lawmakers were also concerned about an earlier
requirement that brokers sign contracts with clients at initial
meetings. The document was to include investment projections, fee
disclosures and other detailed information.
The contracts are required in the final rule, but can be as short as
a paragraph, signed later and tucked into paperwork that customers
sign when opening new accounts, Labor Secretary Thomas Perez said.
The final version also loosened guidelines on pay, allowing advisers
to collect "common types of compensation," such as commissions and
revenue-sharing, where brokerages receive payments from mutual-fund
companies to help promote products.
(Additional reporting by Tariro Mzezewa)
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