UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, B.C. 20549

OFFICE OF
THE COMMISSIONER

July 21, 2015

via e-mail: e-ORI@dol.gov

The Honorable Thomas E. Perez
Secretary

U.S. Department of Labor

200 Constitution Avenue, NW
Washington, DC 20210

Re: Fiduciary Proposal
Dear Secretary Perez:

I submit this comment letter on my own behalf and representing my own views in
connection with the Department of Labor’s (“DOL”) proposed rules addressing the definition of
“fiduciary,” conflict of interest requirements for retirement investment advice, and related
proposed exemptions and amendments (“the Fiduciary Proposal”).

It is clear to me that the DOL rulemaking is a fait accompli and that the comment process
is merely perfunctory, yet I feel compelled to weigh in on the Fiduciary Proposal because I am
convinced that the rule, when finalized, will harm investors and the U.S. capital markets. The
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. It brazenly dismisses both suitability as a proper standard of care for brokers and the
FINRA arbitration system as a mechanism to resolve disputes between financial professionals
and their clients — good for plaintiffs’ lawyers, bad for investors.

Broker-dealers utilizing a commission-based fee structure will find it difficult, if not
impossible, to navigate the labyrinth of prohibitions and exemptions contemplated by the
proposal, and many will make the unfortunate — yet entirely rational — choice to stop servicing
certain retirement accounts. High net worth broker-dealer clients will be moved into fee-based
advisory accounts and will pay a premium to the existing commission structure. Less well-
heeled customers will be “fired” by their brokers or jettisoned to robo-advisers. I find it very
convenient that the disparate impact the proposed rule will have on low to moderate income
workers has received scant attention from supporters of the proposal. Like so many other bad
government policies, the DOL rule will affirmatively harm those it ostensibly sets out to help.

Proving that the nanny-state is alive and well, DOL is proposing to substitute its
judgment for that of investors in deciding the type of financial professional and fee structure all


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July 21, 2015
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investors should use when investing their retirement savings. In doing so, it has ignored the
benefits to investors of a disclosure-based approach to mitigating potential conflicts of
interest. Investors benefit from choice: choice of products, choice in advice providers, and
choice in making decisions for themselves.

Since DOL first proposed changes to its fiduciary and conflict of interest rules in 2010,
the industry has been scrambling to find a workable path forward. One particularly popular
notion has been that a Securities and Exchange Commission (“SEC”) rulemaking under Section
913 of the Dodd-Frank Act could stave off an ill-conceived DOL rule. Indeed, many observers
were delighted and encouraged by remarks made by SEC Chair Mary Jo White in March of this
year announcing her view that the Commission should move forward with such a uniform
fiduciary duty rule.!

Unfortunately, those who believe that the SEC can stave off the heavy hand of DOL are
chasing fool’s gold. Section 913 gives the SEC the authority to conduct rulemaking with respect
to broker-dealers’ standard of care when providing personalized investment advice about
securities to a retail customer. Any such standard “shall be no less stringent than the standard
applicable to investment advisers” and “any material conflicts of interest shall be disclosed and
may be consented to by the customer.” Moreover, Section 913 makes clear that commission-
based fees must be permissible under any SEC rules.

Brokers could comply with an SEC rule under Section 913 while continuing to charge
commissions and using disclosure to mitigate conflicts of interest. However, compliance with an
SEC fiduciary rule does not mean compliance with the DOL rule. In the event that the
Commission moves forward with a Section 913 rulemaking, the industry will most likely end up
with two incredibly burdensome and redundant rules. It would have been possible to conduct a
coordinated rulemaking process, but to date the DOL’s actions, and the substance of the DOL
Fiduciary Proposal, reflect a lack of concern for the Commission’s views on these issues.

You have stated that you and Chair White have extensively discussed the Fiduciary
Proposal.” DOL also maintains that the staffs of the two agencies have worked very closely
throughout the drafting process. As you know, I was not included in any of these conversations.
From a distance — a place where a presidentially-appointed SEC Commissioner should not be in
this context — it appears that any interaction between staffs at DOL and the SEC and all of these
discussions with Chair White have borne no fruit. Strikingly, the Fiduciary Proposal does not
contemplate or even mention potential SEC rules or the SEC’s existing regime for regulating

' http://www. investmentnews.com/article/20150317/FREE/150319919/secs-mary-jo-white-says-agency-will-
develop-fiduciary-rule-for.

? See Letter from Adri Jayaratne, Acting Assistant Secretary, Department of Labor, to The Honorable John Kline
and The Honorable Phil Roe dated March 16, 2015, available at
http://edworkforce.house.gov/uploadedfiles/2015.03.16.dol_Itr_to_ew.pdf.

3 Id.


U.S. Securities and Exchange Commission
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Page 3 of 3

broker-dealers and investment advisers. If the DOL were actually serious about working
together with the SEC on an implementable standard, it could have — and should have — included
in its proposal some type of substituted compliance mechanism, in which compliance with an
SEC fiduciary standard would satisfy the DOL rules. Instead, DOL is choosing to substitute its
judgement for that of the expert regulator of broker-dealers, in the process denying investors a
choice in products, services, and financial professionals.

There was a different path that the DOL could have taken. In conjunction with the SEC,
the DOL could have pursued a disclosure-based solution to the alleged excessive fee problem.
Indeed, the Commission has employed a combination of tailored disclosure and market forces for
eight decades to ensure that investors can make informed investment decisions. In the context of
broker fees, fairness is usually in the eye of the beholder — i-e., the investor. Before rolling out
another draconian proposal, the DOL could — and should have — engaged the SEC in a dialogue
about fee disclosure. Indeed, the Commission has been debating this issue for over 12 years, and
despite a failed attempt at broker point of sale disclosure in 2003, the idea of an appropriately-
tailored point of sale disclosure regime is still worthy of pursuing. Perhaps if the Commission
had not been so busy over the last five years rotely implementing nonsensical Dodd-Frank
mandates such as the conflict mineral disclosure rule (which, it turns out, was proposed right
about the same time as the 2010 DOL fiduciary proposal), the agency could have been focusing
on key issues like broker fees.

DOL should 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. The
Fiduciary Proposal will harm investors, plain and simple, and an SEC rulemaking under Section
913 of Dodd-Frank will only make a bad situation worse. Let’s end the rampant nanny-statism
that is motivating both of these rulemakings and instead focus on a disclosure regime that
empowers investors and allows brokerage firms to continue to offer a menu of services to all
types of investors, not just the affluent. Despite the rancor surrounding this debate, it is my hope
and belief that the DOL and SEC can find a reasonable path forward.

Sincerely,