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House bill thwarts small investors

By Sheyna Steiner · Bankrate.com
Friday, June 21, 2013
Posted: 1 pm ET

A House bill that purports to stand for investor protection actually does the exact opposite: It puts up new hurdles in the debate over a uniform fiduciary standard.

At issue is the attempt by the Department of Labor, or DOL, to extend the definition of fiduciary to anyone who provides advice to retirement plans. The bill that came out of the House Financial Services Committee this week is particularly galling given the fact that advisers to retirement plans have no requirement to act in the best interest of plan participants. Those advisers can and do sometimes line their pockets at the expense of people's futures.

The most basic core value of the fiduciary standard is that advisers must act in the best interest of their clients, avoid conflicts of interest and disclose them when conflicts are unavoidable.

The House bill is called the Retail Investor Protection Act.

Not only does the bill block the DOL from issuing a proposal until 60 days after the Securities and Exchange Commission does; the bill, if passed, would make it more difficult for the SEC to issue a rule on a fiduciary standard.

From the story, "Industry groups fear Wagner bill will stop SEC, DOL fiduciary rules in their tracks" on the AdvisorOne website:

SEC Chairwoman Mary Jo White told House Financial Services Committee Chairman Job Hensarling, R-Texas, and ranking member Maxine Waters, D-Calif., in a June 18 letter that (Rep. Ann) Wagner's bill, H.R. 2374, places "new restrictions on the Commission's authority that would … make it difficult for the Commission to adopt such a (fiduciary) rule should it determine to do so."

Any rulemaking … White went on to say, "would include a rigorous economic analysis. If, after such fact-finding and deliberations, the Commission should determine to propose a uniform fiduciary standard of conduct, H.R. 2374 would layer on new statutory requirements for the Commission to satisfy before finalizing any such rules, which could impede this investor focused initiative in what already has been a multi-year process."

What consumer advocates say

"Rep. Wagner has made clear that her goal is to prevent both agencies (SEC and DOL) from acting to protect investors from predatory financial advisers," says Barbara Roper, director of investor protection for the Consumer Federation of America.

"Industry groups have been relentless in their attacks on DOL. It apparently wasn't enough that the agency withdrew their original rule proposal, conducted an economic analysis, is redrafting based on the concerns raised over their original proposal, has promised to issue prohibited transaction exemptions in conjunction with the rule proposal, and has pledged that their rules and any rules the SEC might adopt will not be in conflict," she says.

The upcoming proposal from the DOL is reported to expand the definition of who is a fiduciary under the Employee Retirement Income Security Act, or ERISA, to service providers who were not previously included.

"It is anticipated that the sellers' exemption will be tightened," says Duane Thompson, a senior policy analyst with fi360, a fiduciary consulting firm. "That is an informal term used by the industry for brokers who go to plan sponsors and say, 'Here are some investments you could add to your plan.' The challenge is that the agency contends that plan sponsors think that the broker is acting in their best interest. This would tighten their exemption and apply to more brokers than it did previously."

How 401(k) investor are vulnerable

The fleecing that happens in some small retirement plans should be a national shame, frankly. And the fact that politicians want to pass laws preventing regulators from protecting investors is ... what's the word? Insane.

One way small retirement plans are vulnerable is through revenue-sharing agreements between their plan provider and the mutual fund company. Mutual fund companies effectively give the plan provider money, which the plan participants may not benefit from and generally know nothing about. And further, the plan provider is not acting in the best interest of plan participants by recommending investments, mediocre or otherwise, from which they ultimately benefit.

Even more, the plan provider has no obligation to tell the sponsor of the retirement plan that they have no obligation to act in the best interest of the plan participant. The plan sponsor is often not an expert and may be the head of human resources who is tasked with running the retirement plan.

Courts have ruled that there is nothing wrong with revenue sharing as long as it doesn't affect the investments that an investment provider or adviser recommends.

That's not even the only conflict of interest that 401(k) plan participants could be harmed by. A story from U.S. News and World Report listed seven potential conflicts, one of which was revenue sharing. Others include biased advice, miseducation, bundled funds, the slippery issue of who is legally a fiduciary to the plan, brokerage repayments and soliciting participants for business outside the plan. Those were reported in the 2011 story, "7 conflicts of interest in your 401(k) plan."

And why should the industry change? Its behavior is not only legal, it's practically endorsed by the federal government. Naturally, members of Congress get a pension after five years of service, so they don't have to worry about the shenanigans that go on in 401(k) plans.

There is currently no similar legislation underway in the Senate, AdvisorOne reported. The bill goes to another committee in the House where it may also pass, but it "doesn't have a good chance in the Senate," says Thompson.

Follow me on Twitter: @SheynaSteiner.

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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1 Comment
Gumby
June 24, 2013 at 6:05 pm

The only way to keep short sellers out of business is never use margin to buy stocks. The SEC or Congress is not going to protect you. It is not worth the risk to use margin . If you still need to borrow money to buy stock, borrow from your friends, relatives or groups .. Just neverr borrow from your broker, period! Your broker will be likely to hand your stock on margin over to short sellers and collect commissions as well. Your broker lend you money and has right to lend your stock to short sellers because the margin stock is not yours. Why the SEC allows brokers to lend margin stocks to short sellers , I will never undertstand, but this is how it is, fellas!