The Department of Labor announced its final version of the so-called fiduciary rule today. This rule is expected to be the most disruptive piece of regulation to come down the pike since the Employee Retirement Income Security Act of 1974.
Meanwhile, another significant development occurred last week. On March 30, a federal judge overturned the Financial Stability Oversight Council's decision to designate MetLife as a systemically important financial institution (SIFI). Judge Rosemary Collyer said the council failed to adequately assess MetLife's vulnerability to severe financial distress.
This weekend we enjoyed young visitors from Wisconsin who spent much of their days playing with action toys. In one particularly dark encounter, the evil forces used kryptonite to polarize Superman’s power. Superman and all other Kryptonians have superpowers on Earth because of our yellow sun (Krypton's sun was red). Kryptonite blocks the sun and takes away Superman’s superpower. No easy task in Phoenix, Ariz.!
The recent ruling on MetLife is the DOL’s kryptonite.
The MetLife ruling exposes the government’s erroneous assumptions, specious arguments and capricious conclusions made to assert SIFI status on the carrier. This exposure effectively blocks the sun for the DOL, because the arguments made to and accepted by the court are strikingly similar to the DOL’s rule-making and decision process.
Regulation Doing More Harm than Good
The Wall Street Journal reports:
Judge Rosemary Collyer did more than hand MetLife a victory in its battle to fend off stricter federal oversight. Her decision helps strengthen a mounting backlash to the regime of post-financial-crisis regulations, emboldening critics who say the rules are doing more harm than good.
Americans for Annuity Protection (AAP) has been saying this same thing about the DOL rule since its re-proposal last April. In fact, our white paper on the Flawed Arguments of the Fiduciary Rule, showed that the proposed fiduciary standard does not live up to its very own definition of “best interest” because it adds cost and confusion with multiple layers of rules, compliance and disclosure requirements from multiple regulators all forced on the same market participants. If adopted, the consumer’s best interest will be harmed because their ability to save for retirement will be stymied.
The judge in the MetLife case also questioned the propriety of the process, in which the same council members made the decision about MetLife and heard the company’s appeal. Again, a striking similarity to the fiduciary rule process with the DOL’s rule and Secretary Thomas E. Perez’s recent request to “trust them” to have fairly and open-mindedly accessed the thousands of comments both for and against the rule.
The problems with most of the assumptions made by the DOL have been exposed by many sources – you can find the bulk of these in the comments submitted to the DOL and in AAP’s Flawed Arguments white paper. For example, a five-page White House Economic Advisor memo takes up about a third of its space listing nations that have banned the payment of commissions in recent years. The White House memo doesn’t say whether these bans were arbitrarily put in place, or were supported by studies, and it admits they can’t identify any new studies showing that the commission bans have been beneficial.
In fact, we’ve reported in this column that in the United Kingdom at least, the recent effects are in. A recent report titled The Financial Advisor Market: In Numbers shows that following the ban there are:
• Fewer advisors
• Higher fees
• Lower savings rates
• Higher account balance requirements/effects
These statistics can only conclude that consumers are harmed by limiting their choice of advisory services and business models.
And curiously, the White House memo itself does not demand a fiduciary standard. The point it really seems to make is that fees and especially commissions are always “bad” and that people saving for retirement should just fend for themselves and hope it works out.
The MetLife ruling suggests the government may have overreached. It was reported that Judge Collyer had appeared sympathetic during a hearing in February to arguments the government created a foregone conclusion by starting with a hypothetical assumption that MetLife was failing. This is extraordinarily similar to the complaints that the DOL made a foregone conclusion that consumers were confused by differing standards and that a single standard would improve their retirement planning experience. This conclusion was made with no demonstration or analysis that consumers were in fact confused or were seeking clarity through a uniform standard.
Essentially it is clear that, as anyone who has thoroughly reviewed the Fiduciary Investment Advice: Regulatory Impact Analysis can see, the proposed rule uses facts selectively and presents non-facts as facts to support a predetermined position. AAPs analysis shows three real facts:
1. The DOL does not provide any direct data supporting any demonstration that the current dual system of fiduciary and suitability standards harms fixed annuity consumers. In fact, the fixed annuity marketplace was almost completely ignored in the DOL’s impact analysis.
2. The DOL position that their proposal will “save” money for consumers only measures expense and not performance (paradoxically to how the government typically measures its own programs).
3. The DOL analysis on the positive impact of their “fix” ignores real-world behavioral biases that impact investor decision making and timing of investments.
A very intuitive statement in the Wall Street Journal article concisely articulates our attitude on the fiduciary rule:
“It is time to eliminate ALL discretion in federal government departments, agencies and bureaus. Their actions must be determined by statute, not what THEY think is right.”
A final thought. How ironic that, as with MetLife, the outcome of a rule that was proposed to give lawyers - er, consumers - a litigious course of action, is most likely to be determined by those very same courts!
But, as our action heroes know, it will take superhuman strength, resilience and endurance to make sure that consumers have affordable access to safe, reliable annuities. Do not give up and make sure you stay engaged at www.aapnow.com.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A. Contact Kim at firstname.lastname@example.org.
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