Investment Advice Rules On Standby, Targets End Of 2021

President Joe Biden took office with an overflowing plate of items requiring immediate attention, and the Department of Labor’s investment advice rule was nudged to the side.

The new administration didn’t even withdraw the Trump administration rule, preferring to let it take effect Feb. 16 and worry about working to change it later. The Biden DOL assured the industry that those changes are coming — in the form of a guidance.

But prominent analysts say not to expect much to change in the short term. Instead, advisors and agents should be focused on compliance with the rule by the end of 2021.

And there is a lot of work to be done, Fred Reish, a partner with the law firm Faegre Drinker, said during recent webinars. The DOL and the Internal Revenue Service are both deferring compliance with the new rules until Dec. 20 as long as the “impartial conduct standards” are met.

That means that recommendations by advisors and agents must be made to a best interest standard, with reasonable compensation and no materially misleading statements.

“Nobody anywhere has the processes in place to satisfy these conditions, and they are burdensome,” Reish said during a late-February webinar. “It is going to take between now and December 20 for broker-dealers, banks and trust companies, insurance companies and investment advisors to get all these policies and procedures in place.”

In particular, firms will need to figure out ways of measuring the reasonable compensation, Reish explained, and the ways to mitigate compensation if a conflict exists. It’s going to be “a heavy lift” to get those policies and procedures in place by Dec. 20, Reish said.

An Early Surprise

The industry had expected President Biden to withdraw the rule — an incoming administration can rescind “midnight regulations” published during the final 60 days of a presidential term.

The Trump administration rule has two main parts: a new prohibited transaction exemption that allows advisors to provide conflicted advice for commissions and a reinstatement of the five-part test from 1975 to determine what constitutes investment advice.

The rule surprised some in the industry as a tougher regulation than anticipated from the Trump administration. In particular, it expands the fiduciary duty for advisors handling retirement plan rollovers, a transaction historically treated as a one-time, nonfiduciary service.

“This exemption allows for important investor protections, including a stringent best interest standard of care for fiduciary recommendations of rollovers from ERISA-protected retirement accounts,” said Ali Khawar, deputy assistant secretary of labor for the Employee Benefits Security Administration.

Brad Campbell, a partner at Faegre Drinker, said advising on rollovers will continue to be a tricky area — at least until the DOL clarifies it further. As it stands, the key aspect is whether there is any thought, even vague, of meeting the client again in the future to follow up on the rollover advice or transaction.

“If the answer is yes, we both intend to meet in the future, the DOL views it as an anticipated ongoing relationship,” Campbell explained. “In other words, the beginning of an advice relationship that is fiduciary from the initial advice.”

Campbell does not expect the promised guidance to come out anytime soon.

“My guess is that things will probably sit as they lie for a while, while the new administration decides how to proceed,” Campbell said. “Whether to do a new rule changing the 1975 regulation for what defines fiduciary advice, or changing or eliminating the five steps. So there’s still other shoes to drop down the road potentially, but we probably are entering a period where there’s some stability in the position the government’s taking.”

Pro-Union Bill Concerning To Some

The Protecting the Right to Organize Act (PRO Act) was originally passed by the House of Representatives in February 2020. With President Joe Biden now in office and working with Democratic control of both chambers of Congress, the PRO Act is again relevant.

That has the National Association of Insurance and Financial Advisors concerned. NAIFA is leading a petition drive opposing the bill, which it claims hurts the industry by adding language that expands the definition of “independent contractor” by adopting an ABC test to define who is an “employee.”

The PRO Act redefines the relationship shared between insurance producers, independent broker-dealers, and independent financial advisors with the insurance industry.

“This relationship ensures consumers have the greatest access to products being offered by the insurance industry,” NAIFA said in a blog post. “Creating a new standard that does not exempt these vital individuals from the PRO Act’s ABC test severely limits the scope of insurance products consumers would have access to as well as general distribution of insurance products and investment advice, thereby limiting consumers’ ability to protect themselves and their loved ones.”

In addition, the bill includes a host of pro-labor provisions, including banning “right to work” laws, forbidding employers from replacing strikers, and prohibiting mandatory arbitration agreements in contracts.

The act also provides a private cause of action for unfair labor practices outside of the National Labor Relations Board’s jurisdiction, and introduces new civil penalties for labor law violations, including personal liability.

The left-leaning Economic Policy Institute claims the PRO Act is needed to offset anti-union concessions employers have gained in recent years. The EPI cites Gallup survey data showing that 65% of Americans approve of labor unions. However, union membership is at an all-time low of 12.1%.

“Passing the PRO Act would help restore workers’ ability to organize with their coworkers and negotiate for better pay, benefits, and fairness on the job,” the EPI said in a blog post. “Passing the PRO Act would also promote greater racial economic justice because unions and collective bargaining help shrink the Black-white wage gap and bring greater fairness to the workplace.”

But NAIFA supports the Independent Contractor Status Under the Fair Labor Standards Act rule published by the DOL on Jan. 7, 2021. But that rule was frozen by the Biden administration on his first day in office.

The rule is seen as being more favorable to employers seeking to keep some of its labor force classified as independent contractors. But the Biden team is expected to rework it significantly, or even withdraw the rule.

Biden’s choice to head up the DOL, Marty Walsh, had not been formally confirmed by the Senate as this issue went to press. But Walsh enjoyed a favorable reception at his confirmation hearing and encountered no controversy.

A 30-year union man, Walsh was president of the Laborers’ Union Local 223 when he was elected mayor of Boston in 2014. Walsh was a member of the Massachusetts House of Representatives from 1997 until 2014.

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.