DOL fiduciary rule ‘unnecessary’ and ‘likely to be vacated,’ speaker says

Department of Labor officials heard lavish praise and withering criticism Tuesday morning of its polarizing fiduciary rule package.

And that was just during the first half hour of at least a two-day public hearing. The DOL left open the option of a third day of testimony if needed.

Dozens of speakers are divided into panels testifying before Assistant Secretary of Labor Lisa Gomez, along with Ali Khawar, principal deputy assistant secretary, and Timothy Hauser, deputy assistant secretary for program operations.

Prior to the 9 a.m. hearing start, a trio of industry trade associations held a Zoom-based press availability to reinforce its strenuous opposition. While the possibility exists that the DOL will withdraw its rule, or modify it, that isn't likely, the trade group CEOs agreed.

“We fully expect there will be litigation,” said Susan Neely, CEO of the American Council for Life Insurers.

Finseca CEO Marc Cadin pointed to an Ernst and Young study conclusion that consumers who have life insurance and annuities “have better outcomes." Finseca shared the study with the DOL three times, he added.

“There’s just been no response,” Cadin said. “Are they really listening or are they seeking to impose a regulatory result that will unequivocally harm Americans?”

The DOL released its latest fiduciary rule attempt on Halloween, with President Joe Biden joining for a press conference to denounce "junk fees." The rule was widely criticized by industry trade groups who claim the extension of fiduciary duty to virtually anyone recommending an annuity would have a chilling effect on advice to middle-market savers.

The DOL fiduciary proposal is open for public comment until Jan. 2.

Praise from plan sponsors

The American Retirement Association is an enthusiastic backer of the DOL rule, which gives a much-needed overhaul to the 1975 five-part test for determining fiduciary status, said Brian Graff, CEO of ARA.

"The 1975 regulatory definition of investment advice is ill-suited for advice to plan sponsors with respect to participant-directed 401(k) plans that didn't even exist in 1975," Graff said. "Whether or not there's an ongoing advice relationship on a so-called regular basis, it is simply nonsensical to give an unsophisticated small business owner, who is arguably making a more consequential set of investment decisions on behalf of his or her employees, less investor protection than that same small business owner would likely get with respect to investment advice received on his or her own personal investments."

Graff raised concerns with what he termed the "naughty list" of compensation forms that would be banned by the rule proposal. The only permissible compensation would be the upfront commission, the renewal fee, and any trailing fees. That means no marketing support payments, bonuses or differential compensation.

"There are numerous examples of when differential compensation may be entirely appropriate and in the best interest of plan sponsors and participants, because such differential compensation relates to a specialized investment options, offering different levels of services or features such common options to plan sponsors and participants," Graff explained. "[That] would now be chilled."

Fiduciary rule 'likely to be vacated'

Lisa Bleier is managing director and associate general counsel for the Securities Industry and Financial Markets Association. She noted that Prohibited Transaction Exemption 2020-02 was only implemented two years ago as part of the Trump administration rulemaking.

"Firms that have chosen to use PTE 2020-02 and made changes in their business practices to take this exemption will only face the prospect of yet additional burdens and changes," Bleier said.

Bleier ripped the DOL's decision to deny a request for an extension of a public comment period. 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.

For example, the 2016 fiduciary rule was accompanied by a 75-day comment period and a 15-day extension. After a public hearing, there was then another 15-day comment period.

"We are bothered by the decision to hold the hearing in the middle of comment period," Bleier said. "The purpose of the hearing is to allow the interested persons to review other comments and provide testimony on the position as informed by those other comments."

The fiduciary proposal is "unnecessary" and not backed up by any record of complaints or lawsuits, Bleier said. It is destined to meet the same fate as the 2016 Obama administration fiduciary rule, she added, which a federal appeals court tossed out in 2018.

"In our view, much of the department's proposal is beyond the department's jurisdiction and likely to be vacated by the courts," Bleier said. "This cycle of overbroad regulation and judicial decision disapproval of agency action is very disruptive for firms and their clients."

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.