Fiduciary rule to take effect Sept. 23, setting stage for major changes, legal battle

Department of Labor officials ushered in what is sure to be a fierce, and lengthy, legal battle today with a preview of its long-awaited, and industry despised, Retirement Security Rule.

The official name is merely a euphemism for the fiduciary standard it brings to nearly all sales of life insurance and annuities. To be officially published Thursday in the Federal Register, the RSR will take effect Sept. 23, the DOL said in a news release.

It is expected to overhaul nearly all aspects of the traditional, commission-based insurance sales process, with many compensation practices banned and new compliance structures required. But first, the RSR must withstand the coming court challenges that a 2016 fiduciary rule could not.

Lisa Gomez, assistant secretary, Employee Benefits Security Administration, characterized the new rule as an update of the 1975 five-part test for establishing fiduciary duty. When the test was created, employee 401(k) plans did not exist, Gomez said.

"If you hold yourself out as giving individualized advice that the investor can rely upon to advance their best interest then that's what you must do," she said. "That means your advice should adhere to a professional standard of care."

Meanwhile, industry trade representatives were skeptical that the DOL would produce a workable rule. Extending fiduciary status to insurance producers and other financial representatives will only cut off access to advice and products retirement savers need, said Wayne Chopus, president and CEO of the Insured Retirement Institute.

"In the brief time the 2016 rule was in effect, it caused millions of consumers to lose access to the professional financial guidance of their choice and to products and strategies to help them achieve a financially secure retirement," he said. "We anticipate today’s final rule will produce comparable or worse outcomes."

The rule text is expected to be available on the department's website at 1 p.m. today, officials said.

While the rule takes effect in September, a one-year grace period will follow before full compliance is required, explained Ali Khawar, deputy assistant secretary for the EBSA.

One exception is the “Impartial Conduct Standards” established by the DOL in a 2020 rule update. They include: give advice that is in the best interest of the participant, the agent receive no more than reasonable compensation, and make no materially misleading statements. The ICS requirements take effect in September, Khawar said.

Major compensation changes in rule

Rolled out on Halloween, the newest fiduciary rule continues to drumbeat from the DOL to bring all retirement plans and individual retirement accounts under Employee Retirement Income Security Act of 1974 rules. At 494 pages, the rule makes changes to transaction exemptions that would essentially make all rollover recommendations fiduciary.

The big changes in the fiduciary rule proposal deal with two exemptions, which allow annuity sellers to collect a commission: Prohibited Transaction Exemption 84-24, which dates to 1977, and PTE 2020-02, an alternative created by the Trump administration.

Amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts. Under PTE 2020-02, if an "investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary.

There are strict requirements with this exemption. Along them, the producer must adhere to Impartial Conduct Standards.

ERISA’s fiduciary responsibility rules mandate that ERISA plans pay no more than “reasonable compensation” to service providers, which includes advisors. The definition of "reasonable compensation" isn't fully known yet.

However, “financial Institutions may not use quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives that are intended, or that a reasonable person would conclude are likely, to result in recommendations that are not in Retirement Investors’ Best Interest,” the RSR reads.

Marc Cadin, CEO of Finseca, accused the DOL of  "conducting an ideological campaign to ban commissions." He cited the DOL's "inflammatory and offensive framing of this rule when they initially proposed it, the un-American and absolute disgrace of the lightning pace at which they have pushed this rule through, and the lack of questions or even spirited debate on the substantive issues within this rule."

Changes after public comment

During a call with media members, DOL officials repeatedly stressed the value of the 60-day public comment period held around Thanksgiving and Christmas. Critics noted that, compared to previous fiduciary proposals, it was significantly condensed. The comment period closed Jan. 2 with 19,459 comments received.

"I think a lot of the concerns we've heard from the insurance industry just reflect a disagreement over how we should proceed with this project," said Tim Hauser, deputy assistant secretary for program operations of the EBSA. "So we got the comments. We fully considered that. We addressed them in the rulemaking."

A "lot" of the disclosures that were required in the proposed rule were dropped from the final RSR, Khawar said. With both exemptions PTE 2020-02 and PTE 84-24, "we've broadened the availability of the exemptions" so business models will be less affected, he added.

"If your business model relies on 84-24, we got comments that said that the relief was a bit too narrow," Khawar said. "And there were other kinds of compensation people needed to be able to get relief for and we again have accommodated that. The core standards are still there in both exemptions. But we made sure to broaden that to accommodate some of the comments."

Will the Fifth Circuit agree?

In 2018, a federal appeals court threw out the Obama administration's fiduciary rule. A three-judge panel ruled 2-1 that it went beyond the DOL's mandate from Congress to regulate workplace retirement plans.

The court decision examined the common law meaning of the word “fiduciary,” which requires a relationship of trust and confidence, and determined that Congress codified that common law meaning in the statutory text.

Industry trade associations are expected again to challenge the new rule in court. Khawar insisted that the RSR is a different rule.

"The Fifth Circuit's opinion was quite focused on what they termed relationships of trust and confidence," Khawar said. "What this rule does is to say that in those circumstances, we have this trusted advice professional that is providing individualized advice that is purported to be in a customer's best interest. That kind of is the hallmark of this relationship of trust and confidence."

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.