DOL Hearing Shows Rule Didn’t Settle Many Issues

By John Hilton

The Department of Labor packed all the complaints and concerns industry representatives and consumer advocates could muster into a crisp five-and-a-half-hour hearing today on its investment advice rule.

Concerns fell into a few predictable categories -- with one unpredictable exchange on whether the rule could create a private right of action. Once again, critics made for unlikely alliances as consumer groups were joined in asking that the rule be withdrawn.

The rule would replace the controversial fiduciary rule published by the Obama administration. The Trump replacement has two main parts: a new exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

A sampling of notable speakers and their positions include:

Bradford P. Campbell, partner with Faegre Drinker Biddle & Reath, who argued on behalf of insurance clients that the investment advice rule is not a good fit.

"The inherent supervision control and co-fiduciary status that's baked into the proposal's financial institution and investment professional structure, they simply don't fit into the independent insurance agent model," said Campbell, formerly an assistant secretary of labor under President George W. Bush. "We believe the department needs to provide additional alternative conditions for insurance transactions."

Norman Stein, a professor at Drexel University's Kline School of Law, who told the story of Janice Winston, a telecommunications engineer for 29 years with Verizon. When she retired, Winston took a lump sum distribution from her retirement plan and chose an investment firm recommended by friends to manage her money.

An independent investment fiduciary examined her portfolio some years later, Stein said, and found she had been paying very high fees, which had sapped her account. The new rule proposal is a vague standard that opens the door for similar abuses, he added.

"The 2016 standard was clear and protective," he said. "In contrast, the standard and the proposed exemption provides for less protection, and is inherently ambiguous. It is, as a number of people have already testified, difficult to monitor compliance when you're not sure what the standard really means."

Kevin Carroll, managing director and associate general counsel of the Securities Industry and Financial Markets Association, who enthusiastically endorsed the rule. The DOL proposal aligns nicely with Regulation Best Interest from the Securities and Exchange Commission, Carroll noted. RegBI, which took effect June 30, is already motivating member firms to eliminate conflicts, he said.

"We conducted a survey of nearly 50 of our member firms, and more than half of firms reported that they plan to eliminate certain conflicts of interest," Carroll said. "Nearly 70% of firms reported that they would enhance their existing conflict registry. Members also report that Reg BI was driving their business models toward eliminating certain products and services from their retail customer product shelf, such as mutual funds with high fees and low analyst ratings."

Private Right Of Action?

It was late in the day when Kent A. Mason, partner with Davis & Harmon, got everyone's attention with a discussion of the potential liability of the investment advice rule.

The investment advice rule contains a statement in the preamble that it does not grant a private right of action, but Mason said that will not be enough.

"Contrary to the preamble statement, the exemption requirement to acknowledge fiduciary status would unnecessarily trigger new liabilities and private rights of action, which were a core reason for the failure of the 2016 rule," he wrote in a comment letter.

Asked to explain further by DOL officials, Mason said the commitment to follow a standard equates to a contract.

"That is an agreement that could be enforced under contract law, just like the best interest contract," he explained. "There's a way we could frame it to say here are standards that apply, but I am not binding myself in any way under a sort of an agreement."

Jeanne Klinefelter Wilson, assistant secretary of the Employee Benefits Security Administration, followed up by asking Mason whether a clear disclosure in the exemption would eliminate the liability threat.

While admitting to retaining "some nervousness" about that approach, Mason added: "I do think that is possible to structure the disclosure to say 'Here are standards, we are not binding ourselves as a matter of contract.'"

Mason added that his comment to the SEC on Reg BI was to "say very explicitly in the disclosure, 'We disclaim any contractual liability based on this disclosure.' If your intent is not to create a private right of action, there is no reason not to include that."

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.

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.