DOL Rule Threatens Independent Insurance Agents, Advocates Say

The viability of independent insurance-only agents and their distributors is threatened by the proposed Department of Labor investment advice rule, industry advocates say.

"We cannot emphasize enough how jarring this rule will be to the insurance industry if it suddenly goes into effect," said Kim O'Brien, CEO of the Federation of Americans for Consumer Choice, during a DOL public hearing last week.

A big issue is wording in the rule preamble that equates the payment of trail commissions with an "ongoing relationship" and possibly fiduciary status.

"We strongly disagree that trailing commissions imply anything at all about the relationship between the purchaser of the insurance product and the salesperson," said the Committee of Annuity Insurers in a letter. "Insurance companies that issue annuities and other products pay commissions to intermediaries and financial professionals over time for a variety of economic reasons."

The Committee of Annuity Insurers includes nearly all of the major insurance companies. One of those companies, Pacific Life, also sent its own letter to the DOL objecting to language in the rule designating insurers as a "financial institution."

If agents receiving trail commissions are to be considered fiduciaries in an "ongoing relationship" with a consumer, the insurance company serving as the financial institution in that transaction will be liable for supervision.

Pacific Life described that scenario as untenable.

"Insurance companies are not privy to whether a given (independent) insurance agent contemplated or conducted an ongoing relationship with a customer," wrote Sharon A. Cheever, senior vice president and general counsel for Pacific Life. "In fact, the insurance company likely does not know about or participate in these decisions."

Insurance marketing organizations and broker general agencies are not considered financial institutions in the rule, Pacific Life noted, which shifts an unfair burden to insurers.

"The DOL should impose this status and its attendant compliance responsibilities on the intermediary that is closest to the Retirement Investor and the front-line financial professional advising that investor," Cheever wrote.

Not Much Time

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.

Throughout the Thursday public hearing, several speakers called on the DOL to withdraw the rule and make changes. However, doing so will certainly mean that no rule is completed and published before the end of President Donald Trump's first term.

Challenger Joe Biden's Democratic platform promises to direct the DOL to write a new rule closer to a uniform fiduciary standard.

The Federation of Americans for Consumer Choice is fighting one battle at a time. The trade group is launching a campaign to get agents to oppose the DOL proposal.

“We think most agents – if they really knew what was going on – would be appalled at what the Department is considering so we want to give them the chance to make their voices heard and wake up public officials," O'Brien said.

O’Brien testified that agents and agencies are worried about whether the rule would require them to get new licenses, force them to work with or for securities brokers, take away their independence, and cause additional insurance and legal costs for compliance.

“They all get that good compliance is important and has a cost but they wonder why do this now when they are already hurting with the pandemic and adjusting to new ways of working with clients,” she told regulators.

Lawsuit?

If lobbying doesn't convince the DOL to modify its investment advice proposal, some speakers suggested that a court verdict might. Specifically, Bradford P. Campbell, a partner with the law firm of Faegre Drinker who testified on behalf of seven insurance industry organizations, said specific flaws in the rule would not "survive court scrutiny."

Campbell, who headed up the Employee Benefits Security Administration under President George W. Bush, said he supported the goals of the rule. But he argued that modifications are needed to the proposed class exemption to allow for insurance and annuity recommendations.

“The proposed class exemption is designed to align with securities regulation, but insurance regulation is materially different in key respects,” Campbell said. “If the Department wishes the exemption to be broad-based and widely used, it must be modified to provide for insurance-specific conditions as an alternative to the securities-specific conditions.”

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.

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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.