Concessions or Corrections: What Motivated Changes to the Final Fiduciary Rule?

By Kim O'Brien InsuranceNewsNet

Commentary

In all of the articles about the fiduciary rule it seems the biggest benefactors today are the reporters. One topic in particular is getting a lot of attention. If you search for “DOL Fiduciary Rule Concessions” you get a long list of articles and commentary.

That is probably because the DOL put out a chart that identified “what the critics said” and how the DOL addressed them. Framed in this pejorative fashion, who can blame reporters who interpret changes as “concessions.”

However, many of the so-called concessions were to resolve conflicts with existing regulation (e.g., FINRA) or other parts of the rule itself, while others appear to appease supporters of the rule’s special interests not the “critics.”

It is a travesty that those whose interests are “special” aren’t retirement savers. Americans for Annuity Protection proposes that the final rule’s lengthy defense and posturing changes as merely addressing “critics,” is a clear attempt to protect the rule from legislative and legal challenges, as well as protecting 401(k) plans from the increasing exodus of participants.

The final rule is almost 60 percent longer than the Proposed Rule – 208 pages compared to 34 and almost 70,000 words compared to 36,000. A tsunami of words (2,500) flood the final pages.

After many readings, we conclude that the department did little in the way of improving the unworkable and harmful aspects of the proposed rule and, instead, spent much of their time (and words) defending their definition of fiduciary, why they included IRAs and what they believe constitutes investment advice.

We have posted a comparison between the two documents at www.aapnow.com. However, the department still has many conflicts to reconcile. First and foremost is the definition of fiduciary, which is imbedded in the Investment Advisor Act (IAA) of 1940.

According to the comment letter filed with the DOL by Eugene Scalia, the late Supreme Court Justice Antonin Scalia’s son, “Congress did not develop this provision in a vacuum, but drew from existing law.” Scalia tells us that the provision was informed by the law of trusts and the law embodied in, and developed under, the IAA. In interpreting the definition of "fiduciary," therefore, both the common law of trusts and the IAA must be consulted, since it is presumed that "Congress is knowledgeable about existing law pertinent to the legislation it enacts."

Scalia challenges and states the following:

“[T]he Department's proposed interpretation of "fiduciary" is vastly overbroad and impermissible.” In enacting ERISA's fiduciary definition, Congress drew upon principles of trust law and the law governing investment advisers and broker-dealers that must be considered in interpreting the statute today. See Corning Glass Works v. Brennan, 417 U.S. 188, 201 (1974); Blitz v. Donovan, 740 F.2d 1241, 1245 (D.C. Cir. 1984). Under trust law, a fiduciary relationship arises in the context of a relationship of special "trust and confidence" between the parties. The DOL proposal, however, would deem persons to be fiduciaries where those hallmarks of a fiduciary relationship are absent, for example, when making a recommendation regarding a single transaction. See 80 Fed. Reg. at 21,934. Further, ERISA's reference to "render[ing] investment advice for a fee or other compensation" incorporates terminology in the IAA, which—in accordance with the industry understanding and practice when the IAA was enacted—excludes broker-dealers executing sales from the definition of "investment adviser."

That is because the payment to broker-dealers is principally for the product acquired or sold, not the advice. That limitation is incorporated in ERISA: The phrase "render[ing] investment advice for a fee" by its terms means that the payment is principally made for the investment advice provided, and not for execution of a financial transaction or the sale of a financial product.”

Second, is the inclusion of IRAs in their definition of “Plan.” As this is a substantive and material change from the original ERISA law, it needs much defending. Including IRAs is a blatant disregard of Congressional intent. The 1974 ERISA law established IRAs as an integral part of the fabric of retirement planning and Congress, purposefully and intentionally, did not include them under ERISA authority.

In their attempt to defend their decision, the department acknowledged that the 2010 proposed rule did an incomplete and inadequate analysis of IRAs and the reason they pulled it was to “take more time for review and to issue a new proposed regulation for comment.”

Sadly, they did not correct their error as they chose to focus on a lopsided and incomplete analysis of the fees found in a narrow and select study of mutual fund IRAs. In doing so, they completely ignored the fund’s investment returns, improved fund choices, and other benefits or values of the IRA itself. They also willfully ignored annuity IRAs.

Third, the final rule needed to correct conflicts with existing FINRA rules. Particularly, what constitutes education versus investment advice.

FINRA Rule 2111 requires, in part, that a broker-dealer or associated person “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the [firm] or associated person to ascertain the customer's investment profile.”

The rule also explicitly covers recommended investment strategies involving securities, including recommendations to ‘hold’ securities.”

The department needed to correct this conflict and acknowledged that recommendations to hold (or by implication sell) securities within the plan itself would be an exception to what constitutes investment advice and, instead, be considered education. And yet, they specifically excluded recommendations to sell the participant’s assets and purchase an IRA. Why? To appease the 401(k) sponsors and providers at the expense of the IRA marketplace?

The highly successful PR machine, operated both by the department itself and the large and loud proponents of the rule, is irrefutable and impressive. But, some things must be called out to protect consumers from a rule that favors certain stakeholders over others, that increases the cost of education and advice, and severely limits access to qualified annuity IRA experts.

Making “concessions” is simply not an accurate portrayal of the changes made between the proposed rule and the final rule. In reality, the changes were an attempt to correct the insurmountable problems inherent in the proposed rule that the “critics” accurately and doggedly pointed out. It is unimaginable that the DOL’s changes did nothing to help consumers. The real winners from the rule are regulator legacies and the 401(k) industry.

As Americans for Annuity Protection and others work on efforts to overturn this bad rule, we must all do what the rule does not - serve retirement savers’ best interests – not regulators or special groups.

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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 [email protected].