Advocates Demand No-Loophole Fiduciary Rule In DOL Letter

This spring bears consumer advocates’ eternal hope that elements of the Obama-era fiduciary rule can be resurrected, squelching the loopholes that they say expose retirement funds to commission-seeking sellers.

More than three dozen organizations sent the Department of Labor a letter last week demanding an investment rule that would eliminate the exemptions that have allowed the sale of commission-based (“conflicted”) products with retirement money. They are calling for something more in line with the Obama-era conflicted advice rule, which was tossed by a court and blocked by congressional action.

The Trump administration replaced it with the Investment Advice Rule, which exempts one-time transactions from ERISA requirements. The one-time transactions do not qualify as investment advice under the “regular basis” prong of the 1975 five-part test that was reinstated by the Trump rule.

“The current regulatory regime with its five-part definition of ‘fiduciary advice’ makes it easy for retirement investment advice providers to avoid fiduciary responsibility even when retirement savers are relying on them as trusted advisers,” according to the letter, signed by consumer groups such as Consumer Federation of America and AARP, along with interest groups and unions such as the Airline Pilots Association International.

They said the current rule’s “loopholes” allow unsuspecting consumers to be sold insurance annuities and other “financially damaging” assets such as gold, bitcoin or collectibles.

“We see no justification for providing ERISA fiduciary protections solely to advice given on a regular basis, while leaving other equally and potentially more consequential advice uncovered,” according to the letter.

The advocates are likely to get some of what they are seeking because although the Biden administration allowed the Trump-era rule to remain, it has not begun enforcing it and is expected to replace it this year, perhaps by summer.

Meanwhile, insurance trade groups are pulling in the other direction, suing the DOL because they say the Investment Advice Rule improperly imposes a fiduciary-like standard on insurance professionals in one-time transactions. The rule requires sellers to create processes to ensure that they are acting in the best interest of their client and keep documents proving that they did so.

The lawsuit asserts the DOL overstepped its authority with the current Investment Advice Rule, carrying “forward the core problem the Fifth Circuit identified in vacating the Fiduciary Rule the first time,” adding that “pouring the same old wine into a new bottle does not change the result.”

Exemption Amending

The consumer advocates said the Obama-era fiduciary rule instituted in late 2016 was effective, even though it never really went into effect because of delays under the Trump administration. The letter writers said insurers sold fewer inferior, high-expense annuities because sellers placed a greater weight on investor interests.

The letter calls for the DOL to eliminate loopholes in the definition of “fiduciary investment advice” to align with the letter and spirit of ERISA. The advocates also want better definition betewwn investment advice and education, because “retirement investment providers have long sought to avoid application of the fiduciary standard by characterizing advisory materials that retirement investors reasonably believe is fiduciary advice, as ‘investment education.’”

Most of the demands focus on the Prohibited Transaction Exemption 2020-02, which the advocates say does not actually require sellers to put consumers’ best interest first.

The group wants the DOL to change PTE 2020-02 by:

• Requiring financial institutions or investment professionals to monitor ongoing investment relationships, “even if, as we urge, the Department removes the ‘regular basis’ element of the definition.”

• Strengthening the requirement for a written disclose of the services and conflicts of interest arising out of the services and any recommended investment transactions. The advocates said that even though the disclosures can be based on the Securities and Exchange Commission’s Regulation Best Interest standard and the National Association of Insurance Commissioners’ model rule, there is no evidence that they are effective.

• Defining the timing of the conflict disclosure, which is required before engaging in the transaction. The advocates say the regulation does not specify how much time consumers should have to review the disclosure or even that the sellers discuss the disclosure with consumers to ensure their understanding. “Such disclosures convey important, yet inherently complex, information, so they should be made well before an investment transaction is executed to minimize the risk of an uninformed decision,” according to the letter.

• Eliminating the exemption’s self-correction provision. Instead of ensuring self-policing because sellers would be able to correct mistakes, the reg encourages lax oversight because when violators are discovered, they know they can “self-correct” and evade sanctions. “The Department should retain discretion to grant relief only in those instances where the violation is minor, demonstrably unintentional, and quickly corrected.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].

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Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].