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Divided Loyalty: Financial Industry Fights To Keep Its Interests Ahead of Investors'

It took almost six years, but the government is about to issue a rule imposing a higher standard of care on financial professionals who provide advice on IRAs and 401(k)s. The effort faced stiff resistance from the financial industry, which is doing everything it can to delay, kill, or weaken the rule.

The fight is over a proposed revision to federal law that will expand the circumstances under which stockbrokers, financial planners, and insurance agents have a fiduciary duty when advising clients on their retirement funds. A fiduciary must put their clients’ interests first and disclose any conflicts of interest. Under the current standard, advisers can recommend investments that earn them generous fees or commissions but may not be in the client’s best interest—as long as the adviser reasonably believes the investment is “suitable” for the client.

The Department of Labor (DOL) tried to implement a similar change in 2010, but industry-led opposition forced a retreat the following year. In April 2015, DOL issued another proposed rule. With the public comment and regulatory review period nearly over, a final rule is expected sometime in the next few weeks.

Financial service firms and trade groups are eager to preserve the status quo. They have spent millions on lobbying and campaign contributions. For safe measure, they are also trying to whip up public outrage with warnings of dire consequences for the average investor when the final rule takes effect.

Industry-funded grassroots lobbying campaigns use overheated rhetoric to paint the rule as an unwarranted intrusion on personal freedom. Online broker TD Ameritrade provides a typical example. The company set up a web page urging the public to send the DOL and their congressional representatives a form letter stating that the proposed rule “would undermine my ability to plan for my retirement” and that “the government has determined that I am not smart enough to make my own informed investment decisions.”

Sure enough, the TD Ameritrade form letter was copied and pasted into many of the thousands of public comments submitted to the DOL. A large number of anti-rule comments also originated via a website set up by FreedomWorks, a free-market, small-government advocacy group.

Financial industry and pro-business groups like FreedomWorks and the U.S. Chamber of Commerce have strong support in Congress, particularly from members representing Missouri, home to several large investment service firms. Representative Ann Wagner (R-MO), who sponsored a bill delaying the finalization of the DOL rule, has received more than $700,000 in campaign contributions from investment and insurance firms since 2011 and also has a son who works in the industry. Senator Roy Blunt (R-MO), who introduced an appropriations bill preventing DOL from using any funds to finalize, implement, administer, or enforce the proposed rule, has received more than $3 million from securities, investment, and insurance companies and commercial banks since 1995.

Although the proposed rule has the support of influential groups like the AARP, it is the opponents who seem to be winning the day. They have dragged out the rulemaking process while winning concessions on the final rule’s wording.

Meanwhile, the DOL estimates that investors lose $17 billion each year to conflict of interest-tainted advice. What’s worse, many Americans are financially ill-prepared for retirement and are not aware that the investment advice they receive from a professional could be biased or misleading.

We worry that the Americans who are diligently planning for retirement are getting their pockets picked by an under-regulated industry (“You’re in Good Hands”? Don’t bet your life savings on it). But we are equally concerned that the federal rulemaking process is being abused by the interests that have a financial stake in the resulting policy.

By: Neil Gordon
Investigator, POGO

Neil Gordon, Investigator Neil Gordon is an investigator for the Project On Government Oversight. Neil investigates and maintains POGO's Federal Contractor Misconduct Database.

Topics: Financial Sector, Contract Oversight

Related Content: Ethics, Lobbying, Financial Oversight

Authors: Neil Gordon

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