Popular financial radio show host Dave Ramsey caused a firestorm on Twitter last week when he weighed in against the “fiduciary rule”—the controversial pending Department of Labor regulation that would impose new restrictions on a vast swath of financial professionals who handle IRAs and 401(k) accounts. Yet, Ramsey was only echoing concerns about the costs of the rule already expressed by Members of Congress from both parties.
Ramsey Tweeted, “this Obama rule will kill the Middle Class and below ability to access personal advice.” A war of Tweets then broke out between opponents of the rule, and supporters, the latter of which includes fee-based investment advisers expected to benefit from the new costs the rule will shower on their broker competitors.
Fittingly, even before Ramsey came out against the rule, one of his critics called for using the rule against Ramsey, supposedly for providing advice said critic deemed harmful to savers. In an October article in LifeHealthPro, an online trade journal for insurance agents and financial advisers, Michael Markey, an insurance agent and owner of Legacy Financial Network, called for Ramsey to “be regulated and to be held accountable” by the government for the opinions he gives to listeners. Markey hailed the Labor Department rule as ushering a new era in which “entertainers like Dave Ramsey can no longer evade the pursuit of regulatory oversight.”
Experts both for and against the rule I have talked to agree its broad reach could extend to financial media personalities who offer tips to individual audience members, a group that includes not just Ramsey but TV hosts like Suze Orman and Jim Cramer, as well as many other broadcasters who opine on business and investment matters. They would be ensnared by the rule’s broad redefinition of a vast swath of financial professionals as “fiduciaries” and its mandate that these “fiduciaries” only serve the “best interest” of IRA and 401(k) holders.
The main focus of the Labor Department rule has been its likely effects on brokers and their customers. The rule creates a presumption against brokers taking third-party commissions from mutual funds they sell to savers. Because of this, savers who currently pay only a small commission on the execution of an order may have to pay a much larger fee based on a percentage of their assets, which would drive some brokers to simply stop serving middle-income investors. As I note in a new report for the Competitive Enterprise Institute, similar restrictions in Great Britain have caused a “guidance gap” in which brokers have largely stopped serving brokers with assets less than £150,000 ($240,000).
But the potential chilling effect of this rule on free financial discussion in the media is even more frightening. Kent Mason, a partner at the law firm Davis & Harman who has testified before Congress on the ill effects of the fiduciary rule, strongly disagrees with Markey that Ramsey and others should be shut up. But, worryingly, he says Markey is mostly right in his interpretation of the fiduciary rule’s ability to muzzle financial personalities.
“Under the proposed regulation, investment advice from a radio host to a caller regarding the caller’s own investment issues would appear to be fiduciary advice if the advice addresses specific investments,” Mason said in an email. It doesn’t matter that Ramsey and other hosts aren’t compensated by listeners, he adds, as the DOL rule explicitly covers those who give investment advice and receive compensation “from any source.” Mason agrees with Markey that the compensation Ramsey receives from radio stations that carry his show and from book sales are enough to define Ramsey as a “fiduciary” under the rule.
Though the rule does contain an exemption for “recommendations made to the general public,” this wouldn’t protect Ramsey and other radio and television personalities if they gave specific answers to callers or audience members, argue both Mason and Markey. Similarly, Mason adds, while the main part of investment seminars would be exempt, “if during the seminar, someone from the audience asks a question about his or her situation and the speaker answers the question with respect to specific investments, that answer would be fiduciary advice.”
Such limits on financial discussion may seem to violate the First Amendment on its face. But a lawsuit against such restrictions would not be a slam dunk, as this is largely uncharted legal territory. Courts have tread lightly on financial regulation that may harm free speech. In Lowe v. SEC, 472 U.S. 181 (1985), the Supreme Court did strike down a ban by the Securities and Exchange Commission on an investment newsletter published by a convicted felon. But the opinion did not touch upon constitutional issues, as the Court ruled that the law itself – different from the Employee Retirement Income Security Act that governs the Labor Department – applied only to person-to-person, rather than general, advice.
To my knowledge, there has never been a federal court ruling on whether restrictions on financial advice offered to individuals in a public forum would violate the First Amendment. In any event, even if this aspect of the rule were eventually ruled unconstitutional, it may take years before such cases wind their way through the courts, and the free flow of financial discussion would be chilled until such a ruling occurs.
All the more reason for the Labor Department to withdraw the fiduciary rule as written. If it does not do so, Congress must perform its fiduciary duty to the American people and throw out this regulation that is definitely not in savers’ “best interest.”
Originally posted at Forbes.