As opponents line up litigation and legislative support, companies and advisors look at compliance.
Even though it seems like the fighting has been fierce on the Department of Labor’s fiduciary rule, the real battle might just be getting started.
Rule opponents have a new, powerful ally in Speaker Paul Ryan. In late February, he weighed in with a blistering commentary on the Obama administration’s motives for the fiduciary rule, which governs the advice provided to qualified retirement plans, employer plans and individual retirement accounts (IRAs).
“This rule would create more paperwork and record-keeping requirements for planners, meaning higher costs for consumers,” Ryan wrote in a message on his website. “It would also mean less access and fewer options for small businesses.”
Ryan singled out GOP alternative bills that “provide a workable alternative to the administration’s flawed proposal.”
Of these, the Retail Investor Protection Act (RIPA), from Rep. Ann Wagner, R-Mo., has been around the longest. First introduced in 2013, the legislation would prohibit the DOL from instituting new rules governing financial services before the Securities and Exchange Commission (SEC) reviews the proposed regulations.
More recently, the Affordable Retirement Advice Protection Act, introduced by Rep. Phil Roe, R-Tenn., and the Strengthening Access to Valuable Education and Retirement Support Act, put forth by Rep. Peter Roskam, R-Ill., passed a House committee.
Any one of these alternatives “provides a workable alternative to the administration’s flawed proposal,” Ryan said.
Congressional Review Act a Possibility
The Congressional Review Act is one option to counter the DOL rule, said Michael Ricci, Ryan’s communications director.
Passed in 1996 as part of the GOP’s “Contract with America,” the CRA provides a filibuster-proof path for Congress to override a regulatory rule. However, since the president can still veto any CRA resolution, it has worked only once to overturn an executive branch rule.
“We have different avenues,” Ricci said. “No decision’s been made, and one reason for that is we not only want to see what the rule looks like, but we’ve got a lot of Democrats who have signed on to a letter expressing concern about it.”
How much Democrat opposition materializes is an important component of the House response, he added.
Democrats would have to defy an Obama administration that has made the fiduciary rule a high priority. The Office of Management and Budget publication of the rule is timed to ensure the rule is fully adopted prior to the president’s departure from office in January 2017.
“The odds of this rule not going into effect in some form are the equivalent to President Obama appointing Ted Cruz to the Supreme Court,” said Aaron Klein, whose company, Riskalyze, is consulting with firms on how to adapt to the DOL rules.
There is a high expectation among industry types that major carriers with a lot on the line will back litigation to kill the rule. There is precedent for this approach. In 2010, the District of Columbia U.S. Court of Appeals vacated the SEC’s Rule 151A, which regulated indexed annuities as a security.
A subsequent amendment by Sen. Tom Harkin, D-Iowa, to the Dodd-Frank Act ensured that indexed annuities would continue to be regulated as fixed insurance products permanently.
But analysts note that the DOL is not the SEC. In other words, Labor has the full experience and power of the White House in its corner.
The most obvious court challenge is based on whether DOL followed the proper procedures in promulgating its rule, said Fred Reish, a partner at Drinker Biddle & Reath in Los Angeles.
“That is so well-known that I can’t imagine the DOL isn’t doing intensive investigations right now and isn’t going to write a very robust” report in support of its rule, he added during a December interview with InsuranceNewsNet.
Volatile Times for Annuity Sellers
One virtual certainty is that an expanded fiduciary rule is going to change how annuities are sold. Many carriers conceded as much without waiting to see what a final rule looks like.
American International Group sent out the first shock waves when it began shopping its distribution network of four separate broker-dealers collectively known as AIG Advisor Group.
Then MetLife made a big deal, shipping its 4,000-agent Premier Client Group and its affiliated broker-dealer, MetLife Securities, to MassMutual in a $300 million deal.
The apprehensive approach is not surprising, analysts say, and will likely mark the first months and years operating under new rules, if they go into effect.
“It feels like the nature of the conversation is very much ‘Well, what are you going to do?’” said Christopher Raham, principal with Ernst & Young.
Based on conversations with advisors and firms, the Ernst & Young “DOL response team” expects the percentage of advisors who sell annuities to decline, Raham added.
Barring surprise language in the final DOL rule, fixed index annuities could emerge as a go-to product for advisors. FIA sales are already hot, totaling $26.5 billion in the third quarter of 2015, the highest sales level in six years according to Beacon Research.
With variable annuities to require the new DOL Best Interest Contract Exemption, advisors and clients might see FIAs as a better option.
SEC States a Case
The Dodd-Frank Wall Street Reform and Consumer Protection Act specifically authorizes the SEC to adopt a rule imposing a fiduciary duty. The agency plans to do just that, Chairwoman Mary Jo White said in February.
According to SEC rulemaking documents, the agency expects to finish its rule by the fall of this year. Industry observers are not expecting the SEC to harmonize its efforts in any way with the DOL.
“It seems more likely that we’ll be looking at the same sorts of issues, but approaches from different ways,” said Mark Smith, partner with Sutherland Asbill & Brennan, a Washington, D.C., law firm.
A series of emails released in late February highlighted the differences between the DOL and the SEC over the types of improper broker activity that the rule should measure: conflicts of interest or impact on investment returns.
The DOL reportedly rejected numerous recommendations from the SEC and other agencies.
While the fight might not be over, many within the industry are also preparing for a new business model. That means pragmatically looking at timelines for rule mandates on record-keeping and new disclosures.
Scott Stolz, senior vice president of private client group investment products at Raymond James Financial, was hoping that the final rule would give companies like his more leeway to adapt before enforcement begins.
“The best I think we’ll get is a longer timeline where they let us be out of compliance for a while.”
InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].