The long journey to federal Department of Labor rules for selling insurance products with retirement plan dollars is far from over.
In some ways, the journey has come full circle and is back at the starting gate, said a panel sponsored by the National Association for Fixed Annuities.
“We’re continually in a period of flux in this space, which is frustrating to everyone,” said Brad Campbell, a partner at Faegre Drinker Biddle & Reath.
In February, the Department of Labor allowed the investment advice rule, written by the Trump administration, to take effect. If anyone viewed that as a breakthrough in the long back and forth over the rules, they were mistaken.
Instead, the Biden administration is signaling a desire to return to the fiduciary style rule published by the Obama DOL in 2016, Campbell said.
Most recently, the DOL’s spring 2021 Regulatory Agenda confirms that it will be rewriting the definition of fiduciary. The Employee Benefits Security Administration plans to issue the notice of rulemaking by December 2021, the agenda stated.
The industry is probably not going to like what it comes out with, said Steve Kraus, attorney at Carlton Fields, and more lawsuits are the likely response.
“My prediction is there’s going to be another fight just like there was a few years ago,” he said.
The potential legal issue concerning the best interest standard included in the investment advice rule presents a substantial hurdle for the Biden DOL, Campbell explained.
In 2018, the Fifth Circuit Court of Appeals tossed out the Obama fiduciary rule, ruling that the DOL exceeded its authority by creating a new regulatory scheme for the retirement plan space. Essentially, the court ruled that Congress has the authority over individual retirement accounts, not the DOL.
Fast forward to the Trump investment advice rule. It includes a new exemption to permit advisors to be compensated for providing conflicted advice, PTE 2020-02.
Broker-dealers and investment advisors would usually fall under PTE 2020-02. For insurance agents, the much-older PTE 84-24 would be the likely choice. But the DOL has said it will revisit the exemptions with an eye toward amending or eliminating them.
And therein could lie the problem, especially when it comes to how compensation is defined and what compensation is covered under the exemptions.
“It covers a commission, but does it cover administrative payments, marketing reimbursements, loan forgiveness, all sorts of other forms of compensation – are those included in a commission, or can they be included in a commission?” Campbell asked. “While there’s some evidence historically to suggest the answer might be yes, the current DOL has indicated that they don’t really like that.”
This could be where the future lawsuit comes in, Kraus said.
“As far as the Labor Department is concerned, they’re going to interpret that term ‘commissions’ very narrowly and to get a broader interpretation, you’re going to have to go to court I think,” he told NAFA members.
‘These Nitpicky Rules’
With the new DOL plan to redefine “fiduciary,” the new timeline for finalized rulemaking is extended into 2023, the panel noted. In the short term, insurers and producers need to pick one of the two exemptions and get in compliance by Dec. 20, the date the DOL will begin enforcement.
In the long term, Campbell suggested the DOL will try to narrowly define the traditional “special relationship” advisors have with clients.
“I think was DOL might do is say ‘Let’s forget all about this five-part test stuff and all these nitpicky rules about how all these fit together. Why don’t we just look at the objective relationship between these two people, the financial professional and the participant,’” he said.
And that would leave insurance agents to broadcast a big, bold disclosure, Campbell said, something like “I am selling you a product. I am not recommending you advice in your best interest.”
The ensuing battle will be over that disclosure language, he said.
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] Follow him on Twitter @INNJohnH.
© Entire contents copyright 2021 by InsuranceNewsNet.com Inc. All rights reserved. No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.