Lawmakers and industry officials debated the merits Thursday ofdraft legislation put forth by Rep. Ann Wagner, R-Mo., thatwould repeal the Department of Labor’s fiduciary rule and applya best interest standard to broker-dealers when providinginvestment advice.

During the Thursday hearing held by the House Financial ServicesCapital Markets Subcommittee titled the “Impact of the DOLFiduciary Rule on the Capital Markets,” Wagner, chairwoman of theHouse Financial Services Committee’s Oversight and InvestigationsSubcommittee, and a steadfast opponent of Labor’s fiduciary rule,stated that her discussion draft “would apply a workablebest interest standard for broker-dealers when providing investmentadvice without losing access for such advice for millions of low-and middle-income investors.”

Wagner stated that her draft bill also keeps the fiduciary issue“under the jurisdiction of the SEC, the expert regulator who hasthe experience of overseeing the industry.”

Broker-dealers, she said, “should provide advice that is intheir customers’ best interest, and this draft bill will make thatabsolutely clear with a standard that applies to both investmentand retirement accounts, unlike Labor’s rule.”

David Knoch, president of 1st Global based in Dallas, whotestified at the hearing on behalf of the Financial ServicesInstitute, stated that FSI supports Wagner’s discussion draftbecause “it creates a uniform standard of care enforced by the SECas the appropriate jurisdictional agency with the necessaryexpertise, and provides for reasonable and streamlined disclosuresas a way to require industry participants to communicate theirconflicts.”

But Cristina Martin Firvida, director of Financial Security andConsumer Affairs at AARP, countered during her remarks at thehearing that “a big concern” AARP has about the discussion draft isthat the best interest standard, “as described, is quite vague,”and that the current suitability standard placed on brokers “couldsatisfy” the standard.

“We don’t see how this bill is an improvement on the currentsituation,” Firvida said. “The fiduciary rule directs how toaddress conflicts. The concern we have is that disclosure alonecould satisfy the benchmark.”

Jerome Lombard, president of the Private Client Group at JanneyMontgomery Scott, who testified on behalf of the SecuritiesIndustry and Financial Markets Association, argued, however, thatthe standard in Wagner’s draft is “clearly a higher standard thansuitability,” adding that it would also “apply to all accounts, notjust retirement accounts.”

Knoch noted that the disclosure requirements as set out in thedraft “appears to have the same effect as a Form ADV” thatregistered investment advisors are required to give to theirclients.

Lombard argued that SIFMA believes the “right answer forinvestors is a consistent best interest standard that could applyacross all types of accounts, but does not have the additionalonerous conditions created by the DOL rule.”

A best interest standard “done right by the SEC, the expertagency responsible for broker dealer standards of conduct, wouldprovide protection for retail customers without a bifurcatedcompliance regime imposed on the same market participants bydifferent regulators,” Lombard said.

Noting that SIFMA is “greatly encouraged” by the SEC’s June1 request for public comment on standards ofconduct for investment advisors and broker-dealers, Lombard statedthat SIFMA intends to encourage the agency to “considerestablishing a best interest standard for broker-dealers thatmirrors the elements of the Impartial Conduct Standard under theDOL rule,” which became effective on June 9, “but unlike the DOLrule, would apply across all broker-dealer accounts, not justretirement accounts.”

For that reason, Lombard argued that Labor should, “at aminimum” delay the rule’s Jan. 1, 2018, applicability date “toallow the SEC to lead the effort to put in place a standard thatworks for all accounts.”

Wagner’s legislative draft, he continued, “provides this pathforward by establishing a SEC applied, principles-based standard toensure that all broker-dealer recommendations about securities aredriven by the best interest of the retail customer.”

Rep. Carolyn Maloney, D-N.Y., a fiduciary rulesupporter, argued that Wagner’s draft puts forth a “watered down”standard.

“There are bad actors out there. We have all had people come tous and say: ‘I put my savings with this advisor and they saidthey’d be protected. I lost everything.’ The reason this rule wasput in place was to protect people.”

She encouraged panel members as well as her colleagues to taketheir concerns directly to Labor.

“I took six different problems to DOL and had the rule changed —after much negotiation, we got it changed. They’ll work with you.By the way, it’s a Republican leader now at DOL that has called forthe rule to go in place … This is an important rule that will savepeople’s savings."

Problems Cropping Up Since June 9 EffectiveDate

Since June 9, when the rule’s Impartial Conduct Standards tookhold, “we are beginning to see its harmful impact on America’sretirement savers - limiting product choice and access to advice,while raising costs,” Lombard argued.

“Our customers and advisors are very confused by the phalanx ofnew DOL rules applying to retirement plans. They do not understandwhy there are now two sets of rules, one for retirement accountsand one for taxable brokerage accounts,” Lombard continued.

Since June 9, “customers are restricted from making certaininvestments. Upwards of 10,000 of our customer retirement accountswill be relegated to a ‘no advice service’ desk — as they aretoo small for the risks imposed by the DOL or too costly to placein an advisory account that would remove the supposed conflicts theDOL is trying to regulate.”

Added Lombard: “How switching small retirement savers from afull-service advisor to a 'no advice' service desk is in their bestinterest, I will never understand.”

1^st Global’s Knoch noted his firm’s challenge inoffering SIMPLE IRAs, where account balances can be as low as$50.

“Many of these accounts are offered on a commission basis, andwill be subject to the Best Interest Contract” on Jan. 1. “Due tothe threat of class-action lawsuits, many of our affiliated firmswill no longer offer these plans to small-business clients, andsome will end their existing relationships.”

Since the beginning of 2016, he said, 1^st Globalhas seen the number of SIMPLE IRA accounts drop by over 20%. “Weproject that these accounts will shrink from the 2016 levels by 28%before the end of this year, and by 41% by the end of 2018.”

But AARP’s Firvida argued that the litigation threat to theindustry because of Labor’s rule is overblown. “The litigation thatis permitted in the rule is class action — there has to be asystemic problem before a cause of action can be brought. If thereis a systemic issue in advice, we’d want to address that.”

She added: “It is extremely difficult to certify a class. Iwanted to be clear on what is the scope of the litigationrisk.”