DOL fiduciary proposal applies ‘major hammer’ to bad advice, panel says

The Department of Labor fiduciary rule proposal went public Oct. 31 with no obvious exposure to lawsuits. That was welcome news for producers.

But a closer look at the 494 pages reveals the potential for severe penalties for any failure to adhere to the fiduciary standards, say lawyers from Groom Law Group.

"Violations of the prohibited transaction rules come with massive excise taxes and potential civil money penalties," said Michael Kreps, chair of Groom's Retirement Services group. "It's just a major hammer that they've got for enforcement."

Groom hosted a webinar Wednesday for National Association for Fixed Annuities' members. With a full month to study the rule, the Groom lawyers dug deeper into the details.

The fiduciary proposal would make virtually any recommendation with retirement plan or individual retirement account dollars a fiduciary transaction. The proposal scraps the five-part test used since 1975 to determine fiduciary advice. If it becomes law, the rule is sure to be challenged in court, where the legality is likely to hinge on whether one-time advice can be considered a relationship of "trust" and "confidence."

'This is very concerning'

Reviewing the penalties section of the rule, Kevin Walsh, principal at Groom, pointed to an enforcement provision that could be deemed unconstitutional. The section describes a 10-year ban from using Prohibited Transaction Exemption 84-24:

It's the second provision that caused Walsh to say, "this is very concerning to me." Essentially DOL could decide they don't like a producer's sale practices, send he or she a notice of ineligibility, and give the producer 60 days a schedule a hearing. After the hearing the DOL would decide whether or not the producer is banned from using PTE 84-24 for 10 years, Walsh explained.

"DOL is essentially ... giving themselves the ability to say, 'We don't like your sales practices. We are going to strip you of your ability to operate in the retirement space,'" he added.

The bottom line is compensation, the Groom lawyers said. DOL is convinced that some producers are placing their own compensation above the best interests of their clients, many of whom are wholly reliant on retirement plan rollovers to survive their senior years.

"This is the key slide here," Kreps said. "The only from a comp you can get is direct compensation in the form of sales commissions paid by insurers. That's it. So all the other stuff in that list above and just in general, all of it is out the window.

"That is going to be massively disruptive."

Sprinting to the fiduciary finish line

Earlier this month, the DOL denied a request for an extension of a public comment period for its fiduciary rule package. A public hearing will be held Dec. 12-13 in Washington, D.C.

Public comments remain due by Jan. 2. A group of trade associations had asked for an extension of the public comment period, citing the precedent set by past DOL fiduciary rule proposals. As of Thursday, the DOL had received more than 1,100 comments.

"If we back out holidays and weekends [and] we back out the two days is scheduled for the hearing, the Department of Labor has given folks 37 business days to respond to their latest 500-page salvo," Walsh said.

It is expected that the DOL will publish the rule in the spring or early summer 2024 and it will surely be sued by industry trade groups.

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.

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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.