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Deloitte: Report on the Anticipated Operational Impacts to Broker-Dealers of the Department of Labor’s Proposed Conflicts of Interest Rule Package

This report, conducted by Deloitte in conjunction with SIFMA members, highlights operational “hot spots” reflecting required operational changes to systems, personnel, processes and business models. Specifically, the report identifies areas where the proposed Rule Package will be impractical or impossible to implement as currently drafted. Other areas of the proposed Rule Package are so broad in scope, subjective and ambiguous that it will be impossible to build operational systems and processes to ensure compliance. Finally, the proposed Rule Package will impose requirements that conflict with existing regulatory obligations and legal agreements. Broker-dealers will face immense challenges in operationalizing the requirements of the proposed Rule Package and there may be significant unintended consequences for the broker-dealer industry as well as individual investors which the industry serves.

The report also includes a cost survey to understand how the Rule Package requirements may impact operational expenses for implementing and maintaining the operational changes, processes and systems that will be required for compliance. The survey found that the estimated cost to comply with the DOL’s proposed Rule Package is considerably greater than the estimates for the broker-dealer industry provided by the DOL in its Regulatory Impact Analysis. The survey estimates that, for large and medium firms in the broker-dealer industry, total start-up costs alone would be $4.7 billion and on-going costs would be $1.1 billion. This is nearly double the estimated cost provided by the DOL in its analysis.

The DOL proposal will have broad and extensive operational impacts into many areas of financial services institutions, including profound changes to existing business models, compensations practices of broker-dealers, available investments, client relationships and firm operations and infrastructure. Furthermore, there is concern that the punitive and automatic nature of excise taxes for non-compliance, even in instances of immaterial or inadvertent non-compliance, coupled with the view that many of the Rule Package requirements are impractical and ambiguous, may cause some financial services firms to exit the market, terminate smaller accounts or migrate to wrap programs where suitable.

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Excerpt

Executive Summary 

On April 20, 2015, the Department of Labor (“DOL”) proposed1 a new definition of investment advice fiduciary under 29 CFR 2510.3-21 and a series of prohibited transaction exemptions (referred to as the “Rule Package” throughout the document). From the DOL’s perspective the amended rules are designed to provide further protection to the public from “questionable retirement investment advice” by requiring retirement advisors to follow strict “fiduciary” standards2. However, the SecuritiesIndustry and Financial Markets Association (“SIFMA”) working group members who participated in the study (“SIFMA Working Group”) indicated that they believe the potential effects of the proposed changes extend beyond the realm of retirement advice and will have broad and extensive operational impacts into many areas of financial services institutions, including profound changes to existing business models, compensations practices of broker-dealers, available investments, client relationships and firm operations and infrastructure.

Existing rules in this area were defined by the Employee Retirement Income Security Act of 1974 (“ERISA”), which was enacted at a time when professionally managed defined benefit pension funds were the retirement norm. Over the past 40 years, however, self-managed investments such as Individual Retirement Accounts (“IRAs”) and other defined contribution arrangements such as 401(k) plans have taken over as the primary ways to save for retirement, which has increased the availability and variety of retirement savings options for individuals. In the view of the SIFMA Working Group, the DOL’s Rule Package may have unintended consequences for the broker-dealer industry as well as individual investors which the industry serves. Consider Figure I.1 that shows almost $20 trillion in US retirement assets will be affected by the proposed Rule Package.