H.R.1090, Retail Investor Protection Act

H.R. 1090

Retail Investor Protection Act

Sponsor
Rep. Ann Wagner

Date
October 27, 2015 (114th Congress, 1st Session)

Staff Contact
John Huston

Floor Situation

On Tuesday, October 27, 2015, the House will consider H.R.1090, the Retail Investor Protection Act (RIPA), under a structured rule. H.R. 1090 was introduced on February 25, 2015 by Rep. Ann Wagner (R-MO) and was referred to the Committee on Financial Services, and in addition, to the Committee on Education and the Workforce. The Financial Services Committee ordered the bill reported by a vote of 34 to 25 on September 30, 2015.

Bill Summary

H.R. 1090 prohibits the Secretary of Labor from finalizing a rule to define the circumstances under which an individual is considered a fiduciary until 60 days after the Securities and Exchange Commission (SEC) issues a final rule to implement Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Additionally, H.R. 1090 requires the SEC, before promulgating a rule under Section 913, to submit a report to Congress considering alternatives outside of a uniform fiduciary standard to reduce any confusion or harm to investors.

Background

The Employee Retirement Income Security Act (ERISA) of 1974 sets standards for most voluntarily established pension and health plans in private industry to provide protection for individuals in these plans.[1] The law and implementing regulations, among other things, established a fiduciary standard to provide enhanced protections to certain consumers.  To be held to the current fiduciary standard with respect to his or her advice, an individual must (1) make recommendations on investing in, purchasing, or selling securities or other property, or give advice as to the value (2) on a regular basis (3) pursuant to a mutual understanding that the advice (4) will serve as a primary basis for investment decisions, and (5) will be individualized to the particular needs of the plan.[2]

DOL first proposed broadening the definition of investment advice, thereby changing the fiduciary standard, in October 2010 to capture activities that currently occur within pension and retirement plans, but do not meet the existing definition of investment advice. The proposed regulation was subsequently withdrawn in September 2011 after significant opposition to the rule in Congress and among stakeholders.  A revised proposal was issued in April 2015 and has also generated significant opposition. [3] Phyllis Borzi, the Assistant Secretary of Labor for the Employee Benefits Security Administration (the agency within DOL charged with implementing certain aspects of ERISA), has indicated a final fiduciary rule would likely be finalized in the first half of 2016.[4]

The Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 grants the SEC broad authority over the securities industry, including the authority to register, regulate, and oversee broker-dealers and investment advisers.  Broker-dealers trade securities for their own account or on behalf of their customers.  Investment advisers provide advice to clients about the value of securities and the advisability of investing in, purchasing, or selling securities.  Historically, brokers-dealers and investment advisers have been held to different standards of conduct in their dealings with their customers. The Financial Industry Regulatory Authority (FINRA), originally founded in 1938 as the National association of Securities Dealer, is the primary regulatory authority for broker-dealers.  FINRA requires that a broker-dealer, when recommending the purchase, sale, or exchange of any security, must have reasonable grounds for believing that the recommendation is “suitable” for the customer given the customer’s financial status and investment objectives.

According to the Committee, “As the SEC is the agency that Congress designated to oversee and regulate the conduct of persons providing investment advice and effecting securities transactions in the United States, the DOL should not act in a vacuum to define how an investor receives financial advice.” Secretary of Labor Thomas Perez testified before the Committee on Education and the Workforce on June 17, 2015, that the DOL coordinated with the SEC regarding the development of the proposed DOL rule, and that the staffs of the two agencies worked closely throughout the drafting process. However, there appears to be disagreement about the level of actual coordination. For example, former SEC Commissioner Daniel Gallagher stated in his comment letter to the DOL proposal that he was not included in any conversations. Former Commissioner Gallagher further commented that, `[f]rom 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.’ As noted above, the DOL proposed rule does not contemplate or even mention potential SEC rules or the SEC’s existing regime for regulating broker-dealers and investment advisers.

Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act authorized but did not mandate the SEC to develop a rule to establish standards of conduct for brokers and dealers that are already in place for investment advisors when providing advice to retail investors

The SEC released the staff study mandated by Section 913 in 2011 and recommended that both broker-dealers and investment advisers be held to a fiduciary standard `no less stringent than currently applied to investment advisers,’ but the five SEC Commissioners did not express a formal view about the analysis, findings, or conclusions of the study.  In 2011, then-SEC Commissioners Kathy Casey and Troy Paredes released a separate statement expressing their view that the SEC staff had failed to justify its recommendations, pointing out that the SEC staff had failed to identify whether investors were being harmed or disadvantaged under one standard of care compared to the other, and therefore lacked a basis for concluding that a uniform standard would improve investor protection. Commissioners Casey and Paredes also questioned the costs that new standards of care would impose on market participants and investors, and noted that the SEC staff study did not account for the potential overall cost of the recommended changes to broker-dealers, investment advisers, and retail investors

“The SEC has not yet issued new rules concerning the standards of conduct to be applied to brokers, dealers, and investment advisers, but in March 2015, SEC Chair Mary Jo White expressed her view that tighter standards are needed for most kinds of financial advisers who recommend investments. She indicated that consideration of this issue is a high priority for the SEC.”[5]

H.R. 1090 will prevent DOL from implementing a rule redefining the fiduciary standard until 60 days after the SEC has issued a final rule to implement Section 913 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

H.R. 1090 is similar to H.R. 2374, which passed the House by a vote of 254 to 166 on October 29, 2013. The Senate did not act upon the House-passed bill in the 113th Congress.

On September 10, 2015, Paul Schott Stevens, President and CEO of the Investment Company Institute, testified before the Financial Services Committee that, “H.R. 1090 reflects a commonsense goal of ensuring that federal agencies work to adopt a harmonized fiduciary duty for all investors and that they do so in a manner that does not jeopardize investor access to personalized and cost-effective investment advice. Simply put, H.R. 1090 reflects a strong purpose–one shared by the Institute–to get the fiduciary rules right.”[6]

According to the bill sponsor, “This legislation will preserve and increase lower and middle income Americans’ access to affordable investments. It will also ensure that retail investors – families and individuals around the country – are not harmed by misguided regulations coming out of Washington.”[7]

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[1] See Department of Labor, “Health Plans & Benefits Employee Retirement Income Security Act — ERISA”.
[2] See CRS Report, “Department of Labor’s 2015 Proposed Fiduciary Rule: Background and Issues,” October 8, 2015.
[3] Id.
[4] See Think Advisor Article, “DOL to ‘Simplify and Streamline’ Fiduciary Rule: Borzi,” October 20, 2015.
[5] See CRS Report, “The Dodd-Frank Wall Street Reform and Consumer Protection Act: Standards of Conduct of Brokers, Dealers, and Investment Advisers,” April 6, 2015.
[6] See House Report 114-304
[7] See Rep. Ann Wagner Press Release, “Wagner Statement on passage of the Retail Investor Protection Act,” October 29, 2013.

Cost

The Congressional Budget Office (CBO) estimates enacting H.R. 1090 would not affect federal spending. DOL has proposed a new rule related to fiduciary standards for advisors of retirement and employee benefit plans but has not published a schedule for implementation. Therefore, adding a contingency—that the SEC act first—may delay the timing of a final rule from DOL, but at no additional cost to the agency.

Amendments

  1. Stephen Lynch (D-MA)—The amendment replaces the bill’s existing requirement that the Department of Labor (DOL) stop its rulemaking pending a final Securities and Exchange Commission (SEC) rule with a requirement that the SEC revises its own regulations governing fiduciary duty no later than 60 days after the DOL finalizes its rule and coordinates its rulemaking with the DOL.

Additional Information

For questions or further information please contact John Huston with the House Republican Policy Committee by email or at 6-5539.