Assistant Secretary of Labor Phyllis Borzi last year promised a robust economic analysis of the proposed fiduciary rule. Oh boy, did she deliver. Not just the opening salvo last winter with the White House’ regulatory impact analysis that concluded broker advice costs retirement investors at least $17 billion, but since then a whole slew of new research papers on both sides of the issue have come forth to stir the kettle.
The first industry rebuttals began trickling out within a month of the White House Council of Economic Advisers’ research on the cost of conflicted investment advice. NERA Economic Consulting’s report of March 15, 2015, heavily criticized the White House report and called it “flawed.”
Since the release of the revised fiduciary rule by the DOL on April 20th, we’ve seen industry counter the DOL’s cost analysis with counterpunches of its own that would leave Floyd Mayweather Jr. dizzy. This is not merely an academic exercise that only an economist would enjoy. From a litigation standpoint, economic impact studies help each side strengthen their case at the point the final rule is challenged in court and can be decisive.
The DOL is acutely aware of the series of reverses suffered by the SEC in recent years over economic analyses that the U.S. Court of Appeals for the District of Columbia Circuit found flawed and doesn’t want to make the same mistake. Hence Ms. Borzi’s pledge to undertake a robust analysis.
The most recent counter-punching by the agency came late last month when the Department released several of its own research papers, some released on Aug. 26th and another on Sept. 8th. These sought to refute industry-sponsored papers coming principally from SIFMA, the primary trade group representing Wall Street, the law firm of Davis & Harman, which testified on behalf of industry opponents in the recent DOL hearing on the rule, and the Financial Services Institute, a trade group of independent broker-dealers.
One notable critique-of a review- of the Council of Economic Affairs’ literature review, by Constantijn W.A. Panis, Ph.D., takes on the NERA March report. While conceding a few valid minor points, Dr. Panis concluded NERA’s analysis offers “many unconvincing ones.” Taken together, Dr. Panis concludes that nowhere does NERA present its own cost estimates of conflicted advice and, overall “fails to detract” from the White House Report’s initial conclusion.
The DOL doesn’t stop there. In the last few weeks it also published letters to SIFMA, Davis and Harman, and the FSI requesting information on the datasets used in their analyses, an inference that the studies were biased. Some of this concern came out during the hearing when DOL staff asked industry witnesses whether their data were representative of the overall industry. The DOL had, prior to the rulemaking, requested data from the brokerage industry to develop its own analysis, a request that was hotly rejected by the industry for various reasons. Instead it used earlier, published data from an Oliver Wyman study and by the Investment Adviser Association on the costs of a fiduciary standard for retail investment advice under a potential SEC rule.
To cap off the DOL’s latest effort on the economic analysis front, the Department also published a letter from the U.K.’s regulator, the Financial Conduct Authority, to the DOL’s lead economist, Joseph Piacentini. The Feb. 10, 2014, letter from the FSA discussed “a number of misconceptions” regarding the impact of the UK regulator’s decision to ban commissions. It essentially said these impressions were overblown and that many other factors, including market demand for advice during an economic recession, should have been considered.
The newly released DOL studies, however, did not completely refute industry claims that the cost of advice would rise based on the UK’s ban on commissions. A study by the RAND Corporation, which was underwritten by the DOL, concluded that while inflows at higher-cost funds have tapered off substantially in the U.K., the cost of financial advice “may have increased modestly” by up to 25 basis points.
The most important point to be made from all of this that the DOL doesn’t need to win the economic analysis debate; it only needs a draw. That’s because the Department needs only to prove, in the event of an administrative rule challenge in court, that it did not act in an arbitrary or capricious manner in determining the rule’s costs and benefits to the industry and public. With a stalemate and the industry unable to score a clear victory that the Department blatantly ignored critical analyses, or worse -- that it was able to debunk the industry reports as biased -- the DOL wins hands down.