New DOL fiduciary rule sets up ‘direct confrontation’ with court precedent

HOLLYWOOD, Fla. –The Department of Labor's latest attempt at an industrywide fiduciary standard is dominating conversation here at the 42nd NAILBA Annual Meeting.

The conference kicked off Wednesday, or one day after the DOL released what it is calling a "retirement security" rule. The rule would make a fiduciary out of virtually any financial professional making recommendations to 401(k) plans and individual retirement account participants.

The new rule is going to hit insurance companies and independent insurance agents the hardest, said Fred Reish, partner at Faegre Drinker. Insurance companies would have much greater oversight responsibilities for their selling agents under the rule, Reish said.

But those compliance requirements could overwhelm smaller independent agents, added Reish, who is not at the conference.

"That's going to be hard for independent insurance agents to comply with because unlike insurance companies and broker-dealers, independent insurance agents don't have like an ERISA attorney. They don't have a chief compliance officer," he said.

For example, someone rolling money out of a retirement plan might want to buy a fixed indexed annuity from an independent agent. Under the new rules, that agent would need to be able to evaluate how the money is invested in the plan, Reish explained.

"Would an independent insurance agent know how to get that information? Probably not," he said. "There's going to be a lot of rethinking processes in the insurance industry."

'A direct confrontation'

The DOL is setting itself up for "a direct confrontation with the Fifth Circuit [Court of Appeals]" said Brad Campbell, partner at Faegre Drinker and former assistant secretary of labor.

In a 2018 decision, the Fifth Circuit tossed out the 2016 fiduciary rule put forth by the Obama administration. The Fifth Circuit ruled that the expansion of the statutory term “fiduciary” was not authorized under ERISA [Employee Retirement Income Security Act].

"The new standard would deem many recommendations to be fiduciary advice that the Fifth Circuit ruled Congress did not intend to capture," Campbell wrote via email. "Simply because DOL believes the law is outdated and doesn’t address modern concerns doesn’t confer on the agency the right to regulate IRA transactions and to impose new best interest standards of care the law did not authorize."

NAILBA is among several industry trade organizations that have come out swinging against the rule. Dan LaBert, CEO of NAILBA, told member that the association has vitally important programming planned for members in the days and weeks ahead.

Kim O'Brien is CEO of the Federation of Americans for Consumer Choice, which has an active lawsuit against the Trump administration investment advice rule. The DOL has mostly stopped defending that rule in court, focusing its energies on the new rule rollout.

FACC will fight the new rule as well, O'Brien confirmed in an email to members. The association "intends to ask the judge in our current case to accept briefing on how this latest DOL proposal supports FACC’s argument that DOL is ignoring the Fifth Circuit decision and testing ways to reinstate the discredited 2016 rule," she wrote.

"DOL needs to be reminded there are three branches of government and it cannot run roughshod over decisions of the U.S. Court of Appeals," O'Brien added.

Marc Cadin, CEO of Finseca, told members that advocacy delivers results. During his presentation from the NAILBA stage, Cadin pointed to California, where a state annuity sales bill changed significantly after trade groups lobbied on behalf of members.

For industry trade groups, a major concern was that the initial version of the California bill would have subjected every seller to “absolutely undefined and open-ended liabilities” by making their primary fiduciary duty to clients rather than to insurance companies. The bill was changed with an amendment, and is now stalled amid pushback from consumer groups.

“Because we were unified as an industry, we have gotten that to a much better place,” Cadin said.

NAILBA is a Finseca community.

2-1 decision

During a Monday briefing, an administration official took note of the words "trust and confidence" that the Fifth Circuit used in its decision on what establishes a fiduciary relationship. The official said the new rule is meeting that test.

There are "fairly significant differences" between the new rule and the 2016 version, the official added. In particular, the new rule sets a very narrow interpretation of the five-part test established in 1975 to determine fiduciary status, the administration official said.

Campbell and others say there are few differences. More likely, the department considers the Fifth Circuit decision an outlier that won't stand up, Campbell has said.

"The Fifth Circuit Court of Appeals decision was a two-to-one decision," Reish noted. "It was not like the whole Fifth Circuit en banc voted against the DOL rule."

An en banc review is heard by all of the judges of a particular court and is generally reserved for complex or important issues.

The DOL might feel another court might render a different decision on its fiduciary effort, Reish said.

"They didn't appeal the [Fifth Circuit] decision. They didn't ask for an en banc hearing," he said. "So we don't know what the ultimate outcome would have been. All we know is what two out of three judges [decided]."

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

© Entire contents copyright 2023 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.