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Senator Warren Questions ''Good Intentions'' behind Study Challenging DOL's Fiduciary Proposal

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

U.S. Senator Elizabeth Warren (D-MA) questioned the "financial and editorial arrangements" behind a current study on the DOL's proposed Conflict of Interest rule. The study was co-authored by former Brookings Institution Senior Fellow Dr. Robert Litan, who also gave testimony on the rule before a senate subcommittee. Senator Warren discussed her concerns in letters to the DOL and the Brookings Institution.

Specifically, Senator Warren questioned the following:

  • Dr. Litan's specific representation of the Brookings Institution as a Nonresident Senior Fellow;
  • the "wildly inconsistent results" of Dr. Litan's study as compared to those of studies from the Council on Economic Advisors and the DOL on the fiduciary proposal;
  • the report's "broad – but vague – disclosure" of the funding behind the study by a group that has publicly criticized "key details" in the proposal; and
  • whether Dr. Litan is "solely responsible for the analysis" in the study, as he told the Health, Education, Labor and Pensions Committee on July 21, 2015, or chose to base that analysis on "some editorial comments," "feedback" and "a few citations in the literature to follow up" that he revealed were provided by the funding group.

Senator Warren cautioned that the following factors have yet to be disclosed fully: (i) the financial industry's editorial input into Dr. Litan's work; (ii) the exact amount of the "sizeable" financial compensation associated with the study; and (iii) "the work-for-hire nature" of the funding group's commission for this work.

"These disclosures are highly disturbing: the study was presented as objective academic research, but the financial and editorial arrangements raise significant questions about the impartiality of this study and its conclusions," Senator Warren concluded.

Commentary

Readers of Dr. Litan's article and related testimony should be able to answer the Senator's questions concerning affiliations and funding. Attached please find links to both. The cover page of Dr. Litan's study contains the following language: "Robert Litan is a non‐resident senior fellow at the Brookings Institution and senior consultant to Economists Inc. Hal Singer is a senior fellow at the Progressive Policy Institute and a principal at Economists Inc. Funding for this paper was provided by the Capital Group, which provides investment management services worldwide. The analysis and conclusions are solely those of the authors." The first page of Dr. Litan's testimony contains text that reads as follows: "Robert Litan is a nonresident senior fellow at the Brookings Institution. This testimony draws on a recent report, supported by the Capital Group, I have co-authored with Hal Singer: 'Good Intentions Gone Wrong: The Yet-to-Be Recognized Costs of the Department of Labor's Fiduciary Rule.' The views expressed here are my own and do not necessarily represent those of the Brookings Institution or the Capital Group, their officers, directors, trustees, or employees."

Dr. Litan's opinions are unremarkable in terms of their straightforward argument;i.e., that the cost-benefit analysis put forward by supporters of the proposed fiduciary rule (i) is flawed because it gives no weight to the potential benefits of human advice and (ii) does not account for the fact that, under the proposed fiduciary rule, investors with limited assets likely would be forced either not to receive any advice or to pay more for such advice (given the costs of the minimum level of service required by the proposed rule). One can certainly disagree with Dr. Litan, attempt to refute his views or take issue with his numbers, but it is difficult to characterize his arguments accurately as devious. 

Dr. Litan's concerns are obvious to market participants. Roughly the same argument can be found in the following three Cabinet comments – all written before the publication of Dr. Litan's study and, in some cases, long before:

House Holds Hearing Regarding Financial Advice (with Delta Strategy Group Summary and Lofchie Comment) (June 17, 2015); NASAA Issues Statements on SEC Recommendations Regarding Investment Advisers and Broker-Dealers (with Lofchie Comment) (Nov. 22, 2013); SEC Survey on Obligations of Broker-Dealers and Investment Advisers to Retail Customers (with Lofchie Comment) (March 1, 2013).

Bottom line: the substance of the concerns that Dr. Litan raises are reasonable. Accordingly, these concerns should be addressed by an equally reasonable discussion or debate about the merits. 

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