Opponents of the Department of Labor fiduciary rule face a daunting obstacle: President Barack Obama.
“When was the last time, if ever, that you heard of a president showing up for the announcement of a proposed rule by a federal agency?” asked James F. Jorden, a Washington attorney and shareholder of Carlton Fields Jorden Burt. “It’s clear that the administration is behind it. It’s a big deal. There’s going to be a rule.”
Jorden made that observation during a session focusing on the DOL rule at LIMRA’s annual meeting in October. Even top insurance executives were surprised by the regulation’s potentially wide impact.
Although the final rule seems inevitable, opposition forces continue to lobby via several different avenues to alter, or even block, the impending fiduciary standard. Many industry observers recall the late-in-the-game victories in summer 2010 that killed the SEC’s Section 151A regulation of indexed annuities.
In that context, let’s review the various strategies rule opponents could employ:
Amendment. In June 2010, Sen. Tom Harkin, D-Iowa, introduced a late amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The amendment was successful and exempted indexed annuities from SEC regulation, ending a two-year fight with the SEC.
Several appropriations bills expected this month offer possible openings for a similar rider stopping the fiduciary rule. However, Democrats appear reluctant to defy the administration, and a presidential veto is always possible. Prognosis: Fair.
Legislation. The Retail Investor Protection Act (RIPA), proposed by Rep. Ann Wagner, R-Mo., would prohibit the Labor Department from instituting new rules governing financial services before the SEC reviews the proposed regulations. The bill passed the full House Oct. 27 by a 245-186 margin.
A similar measure was passed by the House in 2013 but died in the Senate for lack of action. If the RIPA legislation were able to pass the Senate this time, Obama promised to veto the bill. Prognosis: Slim.
Lawsuit. The District of Columbia U.S. Court of Appeals vacated Rule 151A in July 2010, which, coming on the heels of the Harkin amendment, gave opponents a second win against the SEC. The three-judge panel ruled that the SEC “cannot justify the adoption of a particular rule based solely on the assertion that the existence of a rule provides greater clarity to an arena that remained unclear in the absence of any rule.”
Observers disagree on the potential for a lawsuit against the DOL fiduciary rule, but the precedent would seem to favor at least an airing of arguments. Several organizations are at least considering lawsuits after the rule is published, industry insiders say. Prognosis: Good.
Meanwhile, the SEC continues to work on its own fiduciary standard, David Grim, director of the agency’s Division of Investment Management, told House members at an October hearing. That rule is far from completion, he added.
Anyone looking to the SEC to trump the DOL with a less onerous rule would be wise to look elsewhere. The agency is split among Democrat and Republican appointees and has proven unable to agree on a fiduciary standard.
The Warren Effect
Standing in opposition to any softening of the DOL rule is Sen. Elizabeth Warren, D-Mass. The senator has adopted a populist tenor in taking on the insurance industry over annuity sales compensation.
The pro-rule side has a strong public relations angle, said Kim O’Brien, CEO of Americans for Annuity Protection, an annuity awareness group. By painting annuity sellers as opposing a “best interest” standard for their clients, the pro-rule group obfuscates the real negative impact, she said.
“The issue at hand is how do we address a marketplace with problems if we haven’t thoroughly analyzed what the problems are?” O’Brien asked. “Public relations have no role in policysetting. This is a public policy that’s going to affect millions of Americans.”
There is hope for more discussion and, possibly, tapping the brakes on the DOL rule. In an Oct. 20 letter, 47 House Democrats called on the agency to open a 15-to-30-day comment period after a final rule is released, likely early next year.
In the letter, the Democrats said that another comment period can be held “without disrupting your intended timeline of implementing the rule by the end of 2016.” However, others say even the smallest of delays could prevent the administration from putting the rule in place before Obama leaves the White House in 2017.
Agents can still influence, or even defeat, the rule, O’Brien said. Social media feedback is important, she said, advising agents to leave comments on the Facebook pages of Senate Majority Leader Mitch McConnell, House Speaker Paul Ryan, House Minority Leader Nancy Pelosi and Senate Minority Leader Harry Reid.
Messages should focus on supporting another comment period, O’Brien said, as well as focusing on the “double standard” facing annuity sales in 401(k) rollovers. Annuity sales in this space must comply with suitability and fiduciary standards, she explained, an unfair burden.
Last, comments should address the lack of regulatory studies of annuity sales. Most of the regulatory impact analysis completed by the DOL focuses on mutual funds, O’Brien said. There is no evidence of annuity clients being confused by their transactions, she said.
“We really need to conduct a thorough and empirical regulatory impact analysis before we decide what the solution is,” she added.
Agents can also sign a petition or write their representatives at www.aapnow.org, O’Brien said.
Training for Fiduciary
Barring a successful intervention by rule opponents, agents will spend 2016 adapting to a new fiduciary standard. The National Association of Insurance and Financial Advisors (NAIFA) will be ready to help, said Jules O. Gaudreau Jr., president of the organization.
“NAIFA will help our members to adapt by communicating the final rule, wherever it takes us,” he said. “The largest-growing segment of our membership marketplace is independents, so they’re going to need to develop their own business model solutions to the DOL.”
Those expenses are going to cost the industry $5 billion, the Securities Industry and Financial Markets Association estimated.
Much of the agent education will pertain to the required disclosures. Agents will need to know how and when to make the disclosures available.
These include descriptions of material conflicts of interest, information about all fees related to an investment and a statement of whether the financial institution offers any proprietary products or receives any third-party payments with respect to any underlying investments.
Some of these requirements might end up getting cut from the final rule, industry officials say. For many insurance agents, the transition will require substantial work beyond the eight-month phase-in period.
The strong will make it, but difficult times are ahead for the industry, Gaudreau said. Consumers will likely see fewer options as a result, he added.
“While our members can adapt to anything,” Gaudreau said, “there will be a large number of advisors who will consider moving away from the middle market or the rollover market.”