Shifts in the regulatory landscape impact financial professionals

By Alex Kim

While the upcoming election is important, it’s not the sole event we should be tracking. This year, various federal agencies have been busy cranking out regulations that impact our profession and the clients we serve. Financial security professionals are facing significant changes due to three major regulatory updates: the Department of Labor’s fiduciary rule, the Federal Trade Commission’s ban on noncompete agreements, and the DOL’s independent contractor rule.

The DOL fiduciary rule

In his State of the Union address in March, President Joe Biden promised to continue his crackdown on “junk fees.” Almost a month later, the DOL, through an unusually rapid and irregular regulatory process, released its final fiduciary rule. However, there is a disconnect here: Compensation, including commissions, is not the same as junk fees. The DOL’s fiduciary rule will greatly affect how financial security professionals are compensated. More importantly, it will limit clients’ access to retirement advice and products, ultimately jeopardizing their financial security.

If this sounds repetitive, it’s because the DOL has attempted to regulate producers and brokers before. A previous regulatory effort in 2016 was vacated in federal court for exceeding the DOL’s authority, but this has not stopped the DOL from trying again. The new fiduciary rule is already facing legal challenges, but producers, insurance carriers and intermediaries must start planning for compliance.

FTC ban on noncompete agreements

On April 23, the FTC announced its decision to ban existing and future noncompete agreements between employers and employees, with certain exceptions. The ban takes effect on Sept. 4. By this date, employers must provide notice to all current and former employees that any existing noncompete agreements are no longer valid and enforceable.

The FTC ban against noncompete agreements could directly impact certain financial security professionals, depending on their employment with their insurance carrier. Within the industry, there are valid concerns that this ban will negatively affect nonqualified deferred compensation arrangements and forfeiture provisions.

The FTC clarified that nonsolicitation and nondisclosure agreements are distinct from noncompetes and remain valid methods to protect proprietary and sensitive information. However, if the provisions in a nonsolicitation or NDA are overly broad and effectively prevent a worker from working for another employer, they could be considered a de facto noncompete.

Existing noncompete agreements with senior executives — defined as those earning more than $151,164 and involved in policy decisions, namely CEOs and presidents — will remain enforceable. However, new noncompete agreements with senior executives would not be permissible. Additional exemptions apply to not-for-profits, certain franchises and business owners in the process of selling their business.

Covered workers include any employees, independent contractors, interns, volunteers and sole proprietors who work for the business currently or did so.

The DOL final rule on independent contractor classification

Earlier this year, the DOL released its final rule on determining worker classification and independent contractor status under the Fair Labor Standards Act. Under the FLSA, workers considered employees are entitled to wage, hour and overtime protections that ICs do not receive. The rule went into effect on March 11. The final rule rescinds and replaces the 2021 standard implemented during the Trump administration, reverting to an earlier and more worker-friendly version.

It is important to note that this rule originated from concerns about the misclassification of certain workers as ICs. The IC rule addresses a growing recognition that gig economy workers, such as those at Uber, Lyft and Instacart, should receive employee protections outlined in the FLSA, such as minimum wage and overtime pay.

Although these regulations do not directly target the financial security profession, interpreting them could impact it, given the absence of specific exemptions for financial security professionals. Unlike gig workers, financial security professionals, who often operate as ICs, prefer to maintain this status. However, a stricter interpretation of the classification criteria could lead to more financial security professionals being classified as employees rather than ICs. This would bring additional costs and regulatory burdens. Moreover, losing IC status would alter the dynamics of their interaction with clients.

The DOL fiduciary rule, the FTC’s ban on noncompete agreements, and the DOL’s independent contractor rule together mark a transformative period for financial security professionals.

Financial security professionals and their firms must stay informed and adaptable, prioritizing client needs amid these changes. By proactively addressing these shifts, they can navigate the evolving regulatory landscape and continue providing essential financial security and holistic retirement planning for Americans.