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Insurance Industry Approaches Its Next Regulatory Crossroads:
Fiduciary Standards


A fiduciary standards firestorm has ignited in Washington D.C. as the Administration, Congress and regulators debate standards of care for consumers in the retirement marketplace. Recently, at an event hosted by AARP, President Obama announced his support for a uniform fiduciary rule under the Employee Retirement Income Security Act (ERISA) that will be proposed by the Department of Labor (DOL).

During the same event, DOL Secretary Perez unfortunately knocked suitability when he stated, “When you go to a doctor, you expect that advice you get is in your best interest. If you have cancer, you don’t want your doctor telling you what’s suitable for you. Rather, you want your doctor telling you what’s best for you, and what will maximize the chances of saving your life.” Also, the President criticized annuities, citing an example of a couple who “got bad advice to invest in expensive annuities that made it hard for them to access their money.”

In conjunction with this event, the Council of Economic Advisors released a report on conflicting investment advice, which the President and Secretary Perez referenced to support a “level playing field” for all financial professionals. Among other negative contentions, the report suggests that suitability standards are subpar, and it states that commissions are a type of “conflict of interest payment” and “create a financial incentive to recommend products that generate higher commissions and can encourage excessive trading.”

Additionally, the report estimates that “$1.7 trillion of IRA assets are invested in products that generally provide payments which generate conflicts of interest” and therefore costs consumers $17 billion a year.

In response to the proposed rule announcement and this negative report, NAFA issued the following statement:

NAFA strongly urges caution as the Department of Labor moves forward with its proposed rule changing the definition of “fiduciary” under ERISA. While it is laudable to stop bad actors, we are concerned about the potential adverse impacts of the proposal on consumers, small businesses and IRAs. DOL’s recent statement that many financial service professionals care more about their personal compensation than the needs of their clients runs contrary to our members’ professionalism, existing robust regulation and consumer satisfaction rates. While the specific details of the revised proposed rule are not known, commentary from the DOL, along with changes that were proposed in the 2011 withdrawn rule, suggest that the DOL is advocating an onerous, one-size-fits-all approach that will unquestionably have harmful consequences. We must preserve consumer access to investment education, product choice and affordability.

Following the President and Secretary Perez, the Securities and Exchange Commission (SEC) officially jumped into the fiduciary debate with Chairperson White, announcing that she is recommending that the SEC adopt a “principles based” uniform fiduciary standard.

At a recent hearing White stated, “After significant study and consideration, I believe that broker-dealers and investment advisers should be subject to a uniform fiduciary standard of conduct when providing personalized securities advice to retail investors.” Certainly, while the SEC is focused on “securities advice,” depending on the details of a rule there could be overlap into the insurance marketplace. In terms of timing for a rule, Chairman White stated, “We are at the beginning of the process and it is a long process.” We anticipate the SEC will not propose anything until next year. Many stakeholders in the consumer retirement space have been urging the SEC to act for years instead of the DOL, or at least to act prior to the DOL, arguing that that the SEC has greater expertise.

Some observers have rightly questioned the likely confusion that will result from two fiduciary rules. Chairman White has insisted that her staff has been providing “technical assistance” to the DOL, and she asserts that the DOL is “separate” and thus can do what it wants using its ERISA authority.

NAFA has been monitoring this building fiduciary policy debate for many years, and while we hoped the seas would settle, after the Department of Labor released its long awaited fiduciary proposals several weeks ago, it appears that the retirement industry is approaching a significant regulatory crossroads that poses significant threats for our members and the consumers they serve.

For the insurance side of the retirement marketplace that we represent, suitability has been the gold standard of care. The states have done an excellent job enforcing this standard.

However, the DOL’s proposed rule to revise ERISA’s definition of “fiduciary,” in combination with an updated and new prohibited transaction exemption, presents a sweeping and complex regulatory framework that is unworkable. If these proposals are finalized in current form, there will be tremendous adverse consequences for many NAFA members, who would in most instances become a fiduciary with significant compliance burdens, liability, and restrictions on compensation, which will force many retirement professionals and companies out of business. The DOL claims it is being “flexible” in trying to preserve different business and compensation models while protecting consumers, but their proposals are so onerous that many individuals and small businesses will lose access to retirement advisers.

NAFA is reviewing the proposals in greater detail and will be drafting a comment letter that is due July 6. Please stayed tuned as NAFA will need strong grassroots support from its members and industry partners.

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