DOL Open to Changing Fiduciary Proposal

By Cyril Tuohy

The Department of Labor is open to changes to its proposed expansion of the fiduciary standard that would cover all retirement funds, according to a DOL administrator speaking on Monday at a conference in Washington, D.C.

The proposal is aimed at protecting consumers by placing all money in retirement accounts under the fiduciary standard, even for advisors already under the suitability standard. Opponents are saying the rule is onerous, does not offer more protection and will ultimately lead to fewer advising options for consumers.

The recently proposed rules governing qualified and individual retirement plans are seen as some of the most far-reaching ever put forth by the DOL since passage of the Employee Retirement Income Security Act in 1974.

The rule is in a comment period until July 21, to be followed by a public hearing. DOL officials have said that they are paying attention to the comments and expect to adjust the rule accordingly.

In fact, Judith Mares, deputy assistant secretary with the DOL’s Employee Benefits Security Administration, said at the Insured Retirement Institute conference that the DOL’s fiduciary proposal was just that – a proposal.

“We are in a comment period and we’ve not made up our minds,” she said.

The Employee Benefits Security Administration is the agency that would oversee aspects of the rule’s enforcement, particularly a provision some find troubling – “reasonable” compensation. The rule allows exemptions if clients sign a statement acknowledging that their advisor does not have to act in their best interest and then advisors are allowed a commission if it is “reasonable,” which has not been defined.

Another attendee at the IRI Government Legal & Regulatory Conference compared the DOL’s proposed rules to the equivalent of drinking water from a “firehose.”

Troy A. Paredes, a former SEC commissioner, said there’s a cost-benefit analysis to be made with every new rule.

The question, he asked, is who bears the cost of all this regulation?

He said that more regulation isn’t necessarily better for the industry or for investors. He also said that for every dollar spent to fix or improve “broken windows,” means a dollar not spent elsewhere within a regulatory apparatus.

Paredes said that no one should be given a free pass but that at the same time resources allocated to broken windows means regulators have fewer resources to “pursue matters of greater culpability.”

“It’s a matter of how you calibrate across your options,” he said.

The DOL has scheduled an August public hearing on the fiduciary rule, and may even solicit more public comment following the August hearing.

Legislative experts said a possible timeline would have the DOL issue a final rule by next spring with an implementation of the rule sometime before the November 2016 general election, or January 2017 at the latest.

Also during the Conference, federal securities regulators said that examinations of financial advisors and broker-dealers over the past several months raise questions about whether distributors are familiar enough with the variable products they sell.

Russell G. Ryan, senior vice president and deputy chief of enforcement for Financial Industry Regulatory Authority (FINRA), said that even if many of the issues uncovered by the exams weren’t necessarily new, he expressed surprise that firms’ internal regulatory structures didn’t flag the inconsistencies around variable products and their underlying funds.

Ryan, recently appointed to his enforcement role, wondered whether supervisors grasp the nuances of product features, riders, costs, surrender fees and the tax implications that the sale of variable insurance products entail.

“Do people really understand what they are selling?” he said Monday during an “update season” session at the conference.

FINRA and the Securities and Exchange Commission routinely conduct exams of financial advisors and broker-dealers to make sure companies comply. Every year, the two regulatory agencies settle for tens of millions of dollars with the firms they oversee.

Ryan said that if brokers can’t explain variable annuity products to regulators when brokers are called to account, brokers and advisors can’t be expected to explain variable products at the point of sale and look after the interests of clients.

Mavis Kelly, assistant director with the SEC’s National Examination Program Office, said that SEC exams had uncovered blurred business line and executive reporting responsibilities, incomplete statements and incorrect processing of death benefits to multiple beneficiaries.

She also said that retirement investors in variable products are one of the issues that keep her up at night.

This season in particular, industry experts are especially keen to hear industry regulators now that compliance has re-remerged as the top issue for advisors in the wake of the DOL fiduciary rule proposal.

As a counterpoint to the legislative activity and examinations that have turned up shortcomings in the matters of compliance, regulators did note that variable annuity products this year have entered a period of relative calm.

Once loaded with features and generous living benefit riders, insurance carriers have pulled back on the benefits offered through variable annuities and appear more content to tinker with investment-related options around variable contracts.

“Firms have settled down since 2008,” said William J. Kotapish, assistant director with the SEC’s Division of Investment Management.

He said that for the time being, companies seem to be more interested in “plain vanilla” variable annuity contracts.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].