For several years, Department of Labor regulators were the only significant foes the industry worried about when it came to potential fiduciary rules.
Those days are long gone and probably for good.
The Obama-era DOL fiduciary rule is still around, but now it competes with other agencies, states and regulators all racing to pass their own fiduciary or best-interest standards.
The best-case scenario for the industry has cooperation winning the day and a single set of clear, concise and fair standards being established. Odds of that single set materializing are looking longer by the day, analysts say.
Start with the states. So far, Nevada passed a law last summer holding all financial advisors to a fiduciary standard.
New York and New Jersey are among other states with fiduciary-type standards in the works.
This is a particularly vexing approach since an insurer selling nationally could theoretically have 50 different fiduciary standards to navigate.
Perhaps most alarming is how state regulators are charging on well ahead of work by the National Association of Insurance Commissioners. The NAIC is developing a model law for a best-interest standard, but the states seemingly don’t want to wait.
“The prospects for such conflicting standards are very real,” wrote David J. Stertzer, CEO of the Association for Advanced Life Underwriting, in a comment letter. “There is a flurry of activity addressing the standards for recommending annuities and other insurance products.”
While the states and the NAIC try to get together on a fiduciary standard, so too is the Securities and Exchange Commission trying to coordinate a rule that harmonizes with the final DOL rule.
Too many cooks in the kitchen? There are concerns, for sure.
“Best-interest standards for consumers are, politically, a very powerful message for a state legislature,” said Howard Mills, global insurance regulatory leader for Deloitte. “So I think there’s almost a bit of a competition between the regulators and the legislators.”
States in Play
State regulators have been making noise about tightening the financial advice standard for some time. And nobody was surprised when left-leaning states like New York and California emphasized rulemaking following President Donald J. Trump’s upset win over Hillary Clinton.
The seismic jolt hit the following June when Republican Gov. Brian Sandoval signed the Nevada fiduciary bill. Most significantly, the law extends the state’s fiduciary standard to brokers and investment advisors.
Jolt No. 2 hit in December when New York Gov. Andrew Cuomo announced a best-interest standard that would cover “all sales of life insurance and annuity products, beyond the types of advice covered by the DOL rule.”
The New York version, which was followed by a 60-day public notice and comment period, is the strictest fiduciary standard to date. Although the state has a strong liberal bent, analysts were surprised by the rule’s breadth.
The New York proposal imposes “burdensome compliance obligations” and “certain requirements that appear impractical,” the law firm Drinker Biddle & Reath concluded in its analysis.
Likewise, the New York standard exceeds the NAIC model law, the law firm added. NAIC model laws are usually the standards that states defer to when adopting insurance regulation.
While the NAIC law applies a “best interest” standard to annuity sales only, the New York proposal applies to sales of both insurance and annuity products.
“With the Proposal, New York further cements itself as a unique playing field for the life insurance industry,” Drinker Biddle lawyers wrote.
The New York proposal “might be construed to create a continuing duty to monitor and provide advice after the sale,” Drinker Biddle said. “In contrast, the DOL rule allows the person making the recommendation to limit or disclaim a duty to monitor.”
The New York rule “could be interpreted to potentially impose a fiduciary obligation on insurers/annuity writers, even if the producer did not have actual or apparent authority to act on behalf of the insurer/annuity writer — and when the alleged conduct occurs after the point of sale,” the law firm said. “This may create more exposure for insurers/annuity writers in litigation relating to a producer’s alleged misconduct.”
Meanwhile, the NAIC received a host of critical comments on its model best-interest standard. Organizations such as the American Council of Life Insurers and the Insured Retirement Institute said the NAIC has a long way to go.
For example, the IRI expressed concern about the vague treatment of “third-party producers.” Many of IRI’s insurance company members distribute their annuities through third-party producers over whom they have no direct control.
The NAIC draft “will necessarily require subjective and qualitative assessments of each particular client’s circumstances, needs and goals,” wrote Cathy Weatherford, president and CEO of IRI. “Due to the structure and nature of the arrangements between insurers and third-party producers, insurers will not typically have access to all of the information they would need to make their own best interest determinations.”
Most of the comment letters urged the NAIC to work with other agencies pursuing best-interest standards, such as the SEC.
Back to Full Strength
That brings us to the SEC, or the agency where many people feel the fiduciary rule debate should have started, stayed and finished. After all, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 specifically granted fiduciary rule responsibility to the SEC.
Unfortunately, the agency struggled through political wrangling for an extended period. Only recently did the SEC get back to full strength, seating five commissioners for the first time since 2015.
The SEC will likely issue its own fiduciary rule proposal in the next few months. But the good news will come if and when the SEC eclipses the DOL as the lead agency on a best-interest standard, Morgan Stanley analyst Nigel Dally wrote in a client update.
“As the SEC covers a broader range of products than the Department of Labor, who only governs retirement accounts, we heard concern from some investors that these new standards could emerge as a concern,” Dally wrote.
“Our view is somewhat different,” he added. “We view this as a sign that the DOL is passing the regulatory baton to the SEC with respect to individual retirement accounts.”
The Labor Department is expected to spend much of 2018 reworking the fiduciary rule. Onerous aspects, such as the Best Interest Contract Exemption, are likely to be weakened in the final version.
The fall could see rules put forth by both the SEC and the DOL, Drinker Biddle analysts said during a recent webinar. Given the political harmony across both agencies, it is likely they are working together, said Fred Reish, partner in the law firm.
“The industry has long sought standardized rules among various regulatory bodies — SEC, DOL and FINRA — and this, in our view, suggest this may indeed be happening,” Dally wrote.
Commissioners Hester M. Peirce and Robert J. Jackson Jr., both Trump nominees, joined SEC commissioners Kara Stein and Michael Piwowar, along with SEC Chairman Jay Clayton.
A “fully constituted” SEC will give regulators the opportunity to put into place “a clear, consistent best interest standard for financial professionals,” IRI said in a news release.