SEC Commissioner Gallagher Attacks DOL’s Fiduciary Proposal

SEC Commissioner Daniel Gallagher criticized the Department of Labor’s proposed definition of “fiduciary” (the “Fiduciary Proposal”) as well as conflict of interest requirements for retirement investment advice and related proposed exemptions and amendments.

The Commissioner asserted that the Fiduciary Proposal “is grounded in the misguided notion that charging fees based on the amount of assets under management is superior in every respect and for every investor to charging commission-based fees”. He predicted that “the rule, when finalized, will harm investors and U.S. capital markets.” He also stated that the DOL “has ignored the benefits to investors of a disclosure-based approach to mitigating potential conflicts of interest” and that the DOL “substitute[d] its judgment for that of investors in deciding the type of financial professional and fee structure all investors should use when investing their retirement savings.”

Commissioner Gallagher warned that despite the industry’s “scrambling to find a workable path forward” through the SEC rulemaking under Section 913 of the Dodd-Frank Act, “those who believe that the SEC can stave off the heavy hand of DOL are chasing fool’s gold.”

Commissioner Gallagher also said that the DOL had ignored the benefits to investors of pursuing a “disclosure-based solution to the alleged excessive fee problem,” and called for the DOL to “scrap the Fiduciary Proposal and start working in a meaningful way with the Commission to address the DOL’s concerns about broker fees for retirement accounts.”

Lofchie Comment: Commissioner Gallagher emphasizes an issue that is significant to the entire debate, which is the supposed superiority of asset-based advisory fees to brokerage commissions, particularly for investors of limited means. Take the case of an investor with $50,000 in investable assets. An investment adviser charging an advisory fee of 2% a year (which is a very high rate and would be a significant spend for the client) would only receive $1,000 in income from such a client.  That $1,000 of adviser compensation must then compensate for the investment adviser’s (i) ongoing research into the client’s personal situation and (ii) actual investment advice.  In short, if the purpose of the rule is to drive small clients toward hiring investment advisers who will provide them investment advice that is both of high quality and personalized, then the question is whether the rule’s goals can be achieved as to small clients in light of the economics.

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