http://ourfuture.org/20150224/a-new-rule-and-a-brave-official-gain-allies-against-wall-street
[links in on-line article]
A New Rule, and a Brave Official, Gain Allies Against Wall Street
February 24, 2015
A lone bureaucrat has been fighting the financial industry for years, on
an issue that stands at the intersection of two national challenges:
investment regulation and retirement security. Along the way she’s
collected some new and interesting allies. Is that a sign of things to come?
Phyllis Borzi is Assistant Labor Secretary for Employee Benefits
Security. By background she is an attorney, a professor and an expert on
retirement issues and employee benefits. When she was the pension and
employee benefits counsel for a House subcommittee, Borzi became known
as the “mother of COBRA.” That’s the provision that promotes the
continuation of employer-based health care coverage when employment ends.
Borzi has been fighting to extend something called the “fiduciary rule”
to every financial advisor who handles retirement accounts, requiring
them to act in the best interests of their clients. That’s a change from
the current regulatory situation. As Robert Hiltonsmith of Demos told
The Huffington Post, advisors currently “work in their firms’ best
interest, which is not yours.”
Jason Furman, chair of the White House Council of Economic Advisors,
elaborated on a Monday press call:
“When you have a broker who has their compensation directly tied to
the advice they’re giving to a person – often with that person not
knowing that that’s the case – they’re going to … have a big incentive
to steer people [to products] that aren’t necessarily in the best
interest of the client but offer them the greatest compensation.”
Pension plan administrators are required to act in future retirees’ best
interests. But traditional pensions have increasingly given way to
401(k) plans and other financial vehicles that leave critical decisions
up to retirees – typically with the aid of financial advisors who are
not held to the same professional standard.
Borzi, who was confirmed as assistant labor secretary in 2009, wanted to
change that. So she proposed the fiduciary rule back in 2010. It was
abandoned in 2011, after pushback from Wall Street and other commercial
interests. But Thomas Perez, who became labor secretary in 2013, pledged
to support it. The White House has now issued a slightly more moderate
version of the rule and is promoting it heavily.
President Obama said Monday that “We’re going to keep on pushing for
this rule,” adding: “It is the right thing to do for our workers. It’s
the right thing to do for our country.”
It has its opponents, of course. SIFMA – the Securities Industry and
Financial Markets Association – is one of the groups publicly opposing
the rule. “There is no evidence of a crisis, no evidence of a problem,”
the group’s president said last June.
Bernie Madoff’s brother Peter, a former SIFMA board member, was
unavailable for comment. (He’s currently serving a 10-year prison
sentence.) But a statement released today seemed to boil down to one
message: Trust us. The group assured the public that there’s nothing to
worry about and no need for additional regulation.
SIFMA also says that the fiduciary rule would increase the cost of
investment for middle-class Americans and could make it more difficult
for people to find advisors.
That argument was undercut by a new report from the White House Council
of Economic Advisors, which found that “conflicted advice” – where the
advisor has a vested interest – “leads to lower investment returns.” The
report concluded that “the aggregate annual cost of conflicted advice”
to the public “is about $17 billion each year.”
The report found that “a retiree who receives conflicted advice when
rolling over a 401(k) balance to an IRA at retirement will lose an
estimated 12 percent of the value of his or her savings if drawn down
over 30 years.”
The fiduciary rule’s new allies are perhaps even more interesting than
its opponents. While it was not originally one of her core causes, the
White House has been able to bring Sen. Elizabeth Warren (D-Mass.) on
board as an advocate. That’s no surprise. Warren has been defending
consumers against the financial industry since she first proposed the
Consumer Financial Protection Bureau. But the fact that the White House
sought her support is a sign of her growing influence and visibility.
Sen. Cory Booker (D-N.J.) was also on hand for the White House’s rule
announcement. That’s especially interesting because Booker has long been
considered an ally of the financial industry, with the campaign
contributions to prove it. “Wall Street is Betting Big on Cory Booker,”
reported The Fiscal Times in 2014, noting that Booker received nearly $2
million in donations from the securities and investment sector.
Booker famously defended private equity firms, including Mitt Romney’s
Bain Capital, from President Obama’s criticisms in 2012. “I have to just
say from a very personal level,” said Booker, “I’m not about to sit here
and indict private equity. To me, we’re getting to a ridiculous point in
America … If you look at the totality of Bain Capital’s record, they’ve
done a lot to support businesses and grow businesses.”
(I disagree. See here, here, and here.)
Nevertheless, to the surprise of some observers, Booker sided with
Warren in opposing December’s “Citigroup amendment,” a major giveaway to
Wall Street’s biggest banks. And this week he showed his support for the
fiduciary rule. That’s an interesting development.
It’s true that there’s a difference between private equity firms – or
Wall Street banks, for that matter – and the financial advisors who
would be affected by the fiduciary rule. But any criticism of the
financial industry has been off-limits in some segments of the
Democratic Party. Booker’s attendance at this week’s event suggests that
this may be changing. So did the presence of another Democrat, Rep. John
Delaney of Maryland, who had previously voted against the fiduciary rule.
Phyllis Borzi has picked up some interesting supporters in her long
struggle for the fiduciary rule – from a former opponent in the House to
a senator with a Wall Street reputation, and from the secretary of labor
to the president of the United States.
Let’s hope that indicates a shift in the political winds, because there
will be many more financial battles to come.
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