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A House employment subcommittee pushed Secretary of Labor Thomas Perez on Wednesday to explain how a proposed fiduciary duty regulation for financial advisers who work with retirement savers will affect adviser-client relationships and the quantity of lawsuits advisers deal with.

The department's plan is to make advisers act in the best interest of their customers if they get paid to give them personalized advice on how to manage their 401(k) or individual retirement account. Many members of the Subcommittee on Health, Employment, Labor and Pensions were wary of a provision that says the brokers must sign a contract to that effect to earn a commission.

The lawmakers worried the best-interest contract would hurt already existing relationships and scare off new investors.

“Do you think that kind of requirement is going to intimidate the new investors that we need to get into the market and ultimately discourage them from saving? Signing a contract for the average person is a big deal,” said Rep. Virginia Foxx, R-N.C.

Perez said not all work requires a contract, but the contract is a “flexible road map for compliance” instead of just cutting commissions out altogether.

“It’s our Ronald Reagan provision in the rule, which is that we want to trust and verify,” Perez said. “I have yet to meet somebody who is an adviser who hasn’t told me that they put or think they put their clients' best interests first. What we’re saying in this rule is we agree with you, that’s the rule, and it’s now enforceable.”

Additionally, the plan has “broad parameters” for education, which wouldn’t require a contracts, he said. That includes education about asset allocation and trade-offs between risks and rewards.

The rule, which many brokers fiercely oppose, will make more financial advisers subject to the fiduciary standard established under the 1974 Employee Retirement Income Security Act by closing a pair of exemptions allowing advisers to steer clients into investment vehicles that provide brokers with a significant upside, even if it is not the best option for the clients.

Perez said although most advisers watch out for their customers, not all do, and not all customers are aware of that fact.

“It’s perfectly legal for people to give advice that is motivated not by a concern first and foremost for your client's best interest but by the fee structures,” he said.

He said some advisers already work under a fiduciary standard, but others work under a suitability standard where they lead to the best option for the customer that also provides the best commission for the broker. Some advisers work as a mix of both.

“It’s a very confusing world for those who want to get advice,” Perez said.

Several congressmen asked whether additional lawsuits are going to arise from enforcing a fiduciary standard. Perez said fiduciaries can put a mandatory arbitration clause in their plans, and current fiduciaries haven’t been seeing more lawsuits.

“We now have a controlled experiment going on because there’s a substantial subset of people in this space who are already fiduciaries," Perez said. "So, if your theory is correct, that if you’re operating under the best interest standard you are more susceptible to litigation, that hasn’t been borne out. There’s no evidence that folks who are fiduciaries get sued more often. What the evidence shows is that when times are good there tend to be less lawsuits against advisers and when times are bad there tend to be more lawsuits, regardless of whether you’re a broker-dealer or a fiduciary.”

Chairman Phil Roe, R-Tenn., pointed out that fiduciaries aren’t a cure-all against bad apples in the industry.

“Bernie Madoff was a fiduciary, and look what happened there,” he said.

Lawmakers were also wary of a provision requiring advisers to disclose fees for work done.

“The problem now is the system is really really opaque,” Perez responded. “You don’t know what your fees are because there’s a lot of hidden fees. When you publish these and have that sunshine there will be, I predict, third parties that are going to emerge that are going to start the consumer reports of financial advice, and so consumers are going to be more empowered when you have that transparency.”

A few representatives were also concerned with how much communication the U.S. Department of Labor has had with the Securities and Exchange Commission in the drafting of this plan. Eight hundred pages of documents Perez provided to the committee show mainly scheduling appointments and not discussion over content, and a commissioner said Perez had not been in touch with the department, committee members said.

Some committee members, including Roe and John Carter, R-Texas — who said “I’m deeply disturbed by this and not in favor of it at all” — said the plan was unnecessary regulation in an already over-regulated industry, and that it will hurt families and small business owners.

“I wish we were here to discuss a proposal that enjoyed broad bipartisan support, one that would help strengthen our economy and improve the lives of hardworking men and women,” Roe said. “Unfortunately, that’s not the case. Instead we’re here to address a regulatory scheme that will hurt a lot of families, retirees and small-business owners, and it could not come at a worst possible time.”

http://www.law360.com/articles/668784/labor-sec-defends-fiduciary-standard-to-wary-house-panel