Gary Katz, president and CEO of the International Securities Exchange, testified before a U.S. Department of Labor hearing Thursday in the hope of persuading the agency to modify a proposed rule change that could take away investors’ ability to use listed options in their IRA accounts.
Katz testified on behalf of the U.S. Securities Markets Coalition, made up of the U.S. options exchanges and the Options Clearing Corporation (OCC). They oppose the DOL’s “Conflict of Interest Rule” – or at least, one particular aspect of it. The proposed rule could result in the definition of a “fiduciary” being expanded to include many brokers and other service providers to ERISA and IRA plans. Being deemed a fiduciary of an IRA account would prevent these brokers from enabling customers to use options in their IRA.
Currently, brokers are required to collect certain facts from customers to permit them to trade options, including their financial situation and investment objectives. The brokers also provide options education to their customers.
“As we note in our comment letter, we are concerned that conducting this screening – which is intended to identify customers who have sufficient investment knowledge and experience to engage in options trading – may inappropriately cause a broker to be deemed a fiduciary under the proposal,” Katz told the DOL.
Katz referred to a study by the TABB Group, an industry research firm, which estimated that approximately 29 percent of options volume in 2014 was attributable to self-directed individual investors, and that about 15 percent of this individual investor volume comes from IRA accounts.
“This is a very meaningful number and, as an industry, we are deeply concerned about preserving the ability of these investors to trade options in the IRAs should they choose to do so,” Katz said in his testimony.
The options exchanges and the OCC have asked the DOL to make options one of the asset classes that receive an exemption called the “Best Interest Contract Exemption,” which would permit certain transactions involving fiduciaries for IRA accounts.
Speaking by phone with JLN after the hearing, Katz said the testimony went smoothly and that he felt the DOL now has a better understanding of what the options industry is all about and how similar options are to stocks and bonds, which are exempted from the rule.
“We think options are traded in exactly the same way and should be traded in IRA accounts,” he said.
The DOL will get a transcript of all the material from the last few days of testimony and will likely give people a couple more weeks to comment, and then they will deliberate, Katz said.
“We don’t have a timeline on when they will act, but we hope they focus on the narrow aspect we are looking at, and that is to get exchange-traded options included under the definition of “Asset” in the Best Interest Contract Exemption.”
The DOL heard from a number of different groups and individuals over the course of several days regarding the new Conflict of Interest Rule, but Katz was the first to specifically address the concern about options trading not being allowed in IRAs.
The agency will have to review and consider nearly 1,000 comment letters before it makes a decision.