Fiduciary rule goals look suspiciously similar to SEC agenda, analyst says

Oversight of fixed indexed annuities remains just beyond the reach of federal regulators, but the new fiduciary rule might be part of a coordinated effort to change that.

Brad Campbell, partner at Faegre Drinker, said the DOL's message and goals align a little too neatly with a March complaint the Securities and Exchange Commission filed against a Massachusetts advisor for selling annuities.

Starting in 2014, Jeffrey Cutter generated more than  $9.3 million in commissions from the sale of 580 annuities to his investment advisory clients, the SEC said. However, Cutter is both an insurance agent and a registered investment advisor.

He is legally free to sell annuities as a registered insurance agent. But the SEC isn't seeing it that way and the case remains tied up in court.

The complaint quickly drew concerns from industry trade groups and legal analysts, several of whom filed amicus briefs with the court.

"You have to wonder, are these kind of connected?" Campbell asked. "Is there a broader effort by the federal government that fits with what President Biden was saying about inadequate state regulation that suggests that both the SEC and now DOL are trying to do that?"

Campbell, a former assistant secretary of labor under President George W. Bush, made the comments Thursday during an "Inside the Beltway" webinar.

Administration officials released the DOL's long-awaited "Retirement Security Rule: Definition of an Investment Advice Fiduciary" last week. President Joe Biden held an accompanying press conference and emphasized the need to eliminate "junk fees."

"Some advisers and brokers steer their clients toward certain investments not because it's the best interest of the client, because it means the best payout for the broker," Biden said. "I get it, understand it. But I just want you to know we're watching."

'Blurring the line'

A new blog post by the Council of Economic Advisors takes direct aim at fixed indexed annuities. While acknowledging that FIAs, which come with zero downside "may still make sense for certain investors," the CEA claimed that the capped upside is still costing investors a significant amount of lost savings for retirement.

The total assets held in FIAs have grown rapidly. LIMRA reports sales were $23.3 billion in the third quarter, up 9% from the prior year’s results. Year-to-date FIA sales increased 25% to $71.7 billion.

While FIAs come with a zero floor, investors are losing between $5 billion and $7 billion annually due to accompanying caps that limit upside, administration officials claim.

Federal regulators targeted FIAs as far back as 2009, when the SEC adopted Rule 151A. The rule removed FIAs from state insurance oversight and subjected them to federal securities regulation. The industry sued and won a year later when the U.S. Court of Appeals for the D.C. Circuit vacated Rule 151A.

The SEC's stance on insurance agents in the Cutter complain is "really surprising" in the larger context, Campbell said.

"The SEC recognizes when I'm wearing my broker-dealer hat versus when I'm wearing my advisor hat, but they're now blurring the line on when I'm wearing an insurance hat," he said. "We have to wonder how much all that's connected versus coincidental."

Fiduciary rule clock is ticking

The fiduciary rules package is actually one overall rule and changes to three exemptions totaling nearly 500 pages. Among the most worrisome changes for independent insurance agents is making a one-time annuity sale subject to the fiduciary standard.

The rule package is in a public comment phase until Jan. 2, 2024, although industry trade groups are seeking an extension to that deadline.

Once the comments are collected and a public hearing is held, the DOL will do an economic analysis and make revisions for a final rule that will be published some time in 2024, Campbell said. Timing is a big issue for the department given that it will be during an election year.

"They want to have this rule done in enough time for it to stick in the law and be removable only by notice-and-comment rulemaking," Campbell explained. "If they finish this process by roughly next October, they'll be on the timeframe to do that."

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.