The Department of Labor (DOL) fiduciary rule has been justified based on economic analyses by the DOL and the Council of Economic Advisers (CEA) that are flawed and filled with internal contradictions. These flaws come mostly from “cherry picking” and misreading the relevant economic literature, and from ignoring significant costs to millions of small savers that the rule would impose.
These costs come largely from (1) small savers losing access to human financial advisors (because small accounts would become uneconomic to serve, and expose advisory firms to new liability risks), (2) small savers being forced into fee-based advisory relationships that cost more than current commission-based arrangements, and (3) small savers and firms not being encouraged to save more, take full advantage of employer matches, or create retirement plans in the first place.
The DOL’s Regulatory Impact Analysis (RIA) thus concludes erroneously that the net benefit of the rule would be roughly $4 billion per year (the CEA, making related errors, pegs the benefit at $17 billion). A conservative assessment of the rule’s actual economic impact—taking into account the categories of harm noted above that are ignored by DOL and CEA—finds that the cost of depriving clients of human advice during a future market correction (just one of the costs not considered by DOL) could be as much as $80 billion, or twice the claimed ten-year benefits that DOL claims for the rule.
In fact, the decision to stay invested (or not) during times of market stress swamps the impact of all other investment factors affecting long-term retirement savings, including modest differences in advisory fees or investment strategies. “Robo-advice,” which the DOL assumes will over time replace human advisors who find it uneconomic to serve small savers under the new rule, cannot effectively perform this critical role. (An email or text message in the fall of 2008, for example, would not have sufficed to keep millions of panicked savers from selling, with devastating consequences for their nest eggs). In effect, the DOL rule wagers the welfare of millions of Americans on the mistaken notion that ending commission-based compensation is better for small savers than assuring them continued access to human financial advice through an affordable and time-tested model.
At a more technical level, the RIA claims (based on flawed assumptions) that the annual benefit from its rule would be $4 billion per year. A conservative reckoning of the same calculation, taking account of the harms overlooked by DOL, however, finds the rule would actually impose net yearly costs of $2 to $3 billion (on the average ten year base of retirement assets). The loss of brokerage advice alone could adversely affect up to 7 million people.
A less costly alternative that would meet the DOL’s objectives would be to require enhanced but simple disclosures relating to brokers’ compensation from companies sponsoring investment products they sell. The Department’s only basis for rejecting this idea is a claim made without any empirical support that investors could not process this additional information if it were made available. This is an extremely slim reed upon which to base an entire rule that could radically change the way investment advice is provided in a $1 trillion segment of the mutual fund market. How can the Department know the efficacy of greater disclosure, without at least first giving enhanced disclosure in the retirement savings context at least a try? In the end, if it is open to fact-based adjustments in its approach, the DOL will have set in motion a reform process that establishes new protections for small savers without disruptions that would unintentionally harm those it seeks to help.
While regulatory law and best practice generally require less costly alternatives to be pursued, there are also practical reasons for the DOL to take this course. Because of the disruption to the industry that the rule as written will bring—including a forced overhaul of the entire internal compensation systems of brokerage/advisory firms, and massive new paperwork and contracting requirements for millions of clients, under an impractical eight month deadline—the likely result will be an implementation nightmare. Among other things, millions of small savers may be surprised when they are notified in 2016 that new Obama Administration rules mean they are being dropped by longtime advisors, or forced to pay much more via fee-based accounts in order to keep them.
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On June 1, 2015 generation assets previously owned by PPL Corporation were combined with generation assets owned by affiliates of Riverstone Holdings LLC to form Talen Energy. EI Principal John R. Morris led a team at EI that assisted Riverstone in the transaction. EI worked closely with Vinson & Elkins to obtain clearances from the Federal Energy Regulatory Commission and the U.S. Department of Justice.
In early April 2015, Dynegy Inc. acquired two sets of generation assets. Dynegy first acquired EquiPower and Brayton Point from Energy Capital Partners and then acquired Duke Energy’s commercial generation assets and retail business in the Midwest. EI Principal John R. Morris led a team at EI that assisted Dynegy in the transaction. EI worked closely with Skadden, Arps, Meagher & Flom and White & Case to obtain antitrust clearance from the U.S. Department of Justice.
Dr. William Myslinski, one of EI’s founders, testified in federal court three times this spring. He took the stand twice in Philadelphia in the matter of In Re: Processed Egg Products Antitrust Litigation. The first instance was a class certification hearing regarding a putative class of direct purchasers. The second was a class certification hearing regarding a putative class of indirect purchasers. Dr. Myslinski testified on behalf of defendant egg producers and egg processors.
Dr. Myslinski took the stand in Jackson, Mississippi in the matter of Major Mart, Inc. v. Mitchell Distributing, Inc. and Mitchell Beverage, LLC. Mitchell, an Anheuser-Busch distributor with a 75% market share, was accused of monopolizing and attempting to monopolize beer distribution in its distribution territories in northeast Mississippi and tortious interference with business relationships. Dr. Myslinski testified on behalf of Mitchell. The jury found in favor of Mitchell on all counts.
EI Corporate Vice President and Principal Matthew Wright, along with EI economists Michael Baumann, Kevin Caves, Allison Holt, John Gale, and Andrew Card, helped secure recent FTC approval of the $27.4 billion merger between Reynolds American and Lorillard. After a lengthy investigation, a majority of the Commission concluded that the complex transaction, which also included some divestitures to Imperial Tobacco Group, would not lessen competition for combustible cigarettes in the U.S. EI economists worked with attorneys from Jones Day on the antitrust defense of this acquisition.
EI Principal Hal J. Singer and EI Senior Economist Kevin W. Caves publish “On the Utility of Surrogates for Rule of Reason Cases” through Competition Policy International. In the May 2015 CPI Antitrust Chronicle, Singer and Caves analyze whether, when assessing antitrust violations, we should prefer surrogates that permit errors, or should instead rely on a more nebulous rule-of-reason inquiry.
Dr. Su Sun’s article, co-authored with Dr. Fei Deng, “Rainbow v. Johnson & Johnson: RPM Litigation in China” has won the 2015 Antitrust Writing Award as the Best Antitrust Business Article in the Asian Antitrust Category. The article was originally published in the ABA Antitrust Section’s Distribution newsletter in 2014 and can be read at awards.concurrences.com/articles-awards/business-articles-awards/article/rainbow-v-johnson-johnson-rpm-litigation-in-china.
Henry B. McFarland recently spoke on a panel discussing the recent case the U.S. Department of Justice Antitrust Division brought against American Express. The panel discussion was sponsored by the American Bar Association’s Antitrust Section. His remarks focused on economic arguments concerning market definition and market power and on the effects of the court’s decision on the future of the payment card industry.
Dr. McFarland subsequently published a paper on the case, “Economic Arguments in the Amex Trial: Considering Market Definition and Market Power with a Two-Sided Platform,” in Trying Antitrust. That paper focuses on two questions of particular concern in the litigation. First, how were markets defined given that the litigation dealt with a two-sided platform? Second, how was evidence concerning market structure and pricing behavior used in assessing possible market power of a two-sided platform? It is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2587138.
EI Vice President Su Sun publishes an article “Conditional Pricing: The Evolving Frontier of Antitrust Enforcement” on the Winter 2015 issue of The Price Point, a newsletter published by the ABA Antitrust Section’s Pricing Conduct Committee. Drawing on some major cases involving conditional pricing in several jurisdictions, the article provides an overview of current antitrust treatments of conditional pricing, which includes two types of pricing discounts: bundled discounts for multiple products and loyalty discounts for single products.
Principal William Hall, Board Chairman Barry Harris, Principal William Myslinski, Principal Philip Nelson and Special Consultant Bruce Owen are included in the latest edition of The International Who’s Who of Competition Lawyers and Economists 2015. Economists are selected for inclusion based on Global Competition Review’s independent surveys of general counsels and private practice lawyers wolrdwide.
EI Vice President Su Sun co-authored a paper (with Wei Tan and Sebastien Evrard) “China’s Antitrust Policy: Recent Developments and Decision Patterns,” published on Emerging Markets Finance & Trade, November-December 2014, Vol. 50, Supplement 6. The paper reviews recent antitrust policy developments in China, including an econometric study of China’s merger review patterns.
EI Principal and Senior Fellow at the Progressive Policy Institute, Dr. Hal J. Singer, discusses the topic of “net neutrality” and the consequences of adopting public-utility-style regulation under Title II of the Communications Act. Dr. Singer was featured in the New York Times where he discusses Title II’s tax consequences; the Wall Street Journal where he discusses the investment effects of Title II; and on Fox Business News where he discusses the consumer impact of Title II.
Henry McFarland spoke at the Town Hall of the Insurance and Financial Services Committee of the ABA Antitrust Section. As co-chair of the committee, Henry described a number of the committee’s programs. He also introduced speakers who discussed current developments in antitrust and consumer protection in the insurance and financial services industry.
In February 2015, EI Senior Economist Kevin Caves and Principal Hal Singer published an article in The Antitrust Source. Caves and Singer provide an economic analysis of a high-profile class action lawsuit alleging that top executives at some of Silicon Valley’s most prominent companies, including Apple, Google, Intel, and Adobe, conspired to restrict recruiting and hiring of high-tech workers as a mechanism for suppressing compensation. As Caves and Singer explain, an examination of the court’s findings in High-Tech Employee, along with the evidence proffered by experts for both the plaintiffs and the defense, offers insights into some of the “do’s and don’ts” of proving (and disproving) classwide impact in wage suppression cases in particular and in antitrust class actions more generally.
Economists Incorporated is pleased to announce that three of its economists have been nominated for 2015 Antitrust Writing Awards under the auspices of Concurrences Journal and George Washington University Law School Competition Law Center for two separate articles.
EI Principal and Board Chairman Barry Harris and EI Corporate Vice President and Principal Matt Wright (with Kevin Murphy and Bobby Willig) were nominated for Activating Actavis: A More Complete Story, which appeared in Antitrust magazine (Spring 2014). Their article considers the Supreme Court’s decision in FTC v. Actavis and identifies situations where so-called reverse payments may be required to achieve pro-competitive results.
EI Vice President Su Sun (with Fei Deng) was nominated for Rainbow v. Johnson & Johnson: RPM Litigation in China, which appeared in the ABA’s Distribution Newsletter (March 2014). This article considers the Shanghai High People’s Court’s resale price maintenance decision in Rainbow v. Johnson & Johnson Medical China Ltd and discusses, among other things, its embrace of economic analysis.
In March 2013, EI Principal, Dr. Hal J. Singer, published “Estimating the Costs Associated with a Change in Local Number Portability Administration,” which detailed the impact for carriers and consumers of changing number-portability. Dr. Singer was asked by Neustar to revise his previous estimates due to the length of time since the original analysis and has determined that approximately 12 million customers could be adversely affected by the transition, a 68% increase relative to his original estimate. CLICK HERE to read the addendum.
EI Principal Jonathan Neuberger testified on behalf of the government in the AIG shareholder lawsuit (Starr International v. US) stemming from the bailout of AIG during the 2008 financial crisis. Neuberger’s testimony related to the economics of prejudgment interest in a takings case.
EI Principal Philip Nelson, working with Vice President John Gale, Vice President Gale Mosteller, and Principal Steven Siwek, released a new study, “RETAILER PAYMENT SYSTEMS: RELATIVE MERITS OF CASH AND PAYMENT CARDS,” finding that retailers that adopt a cash-only strategy make fewer sales, of smaller dollar-value, yet still incur costs associated with handling cash. Click the following to see the Press Release or Executive Summary. For the full study, Click Here.
EI Principal Hal J. Singer and Dr. Robert Litan released a new study, “Unlocking Patents: Costs of Failure, Benefits of Success,” finding that the biggest problem with the U.S. patent system is not the much-discussed assertion about abusive patent litigation. Rather, it’s a patent licensing market so constricted by high transaction costs and legal risks it prevents literally 95 percent of patented discoveries from ever being put to use to create new products and services, new jobs, and new economic growth. Simply “unlocking” patent licensing from the constraints of those costs, the study finds, would enable tens of thousands of now-dormant inventions to be licensed and commercialized, adding up to $200 billion a year to the economy. Click Here to view the study.
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