Will Annuity Regs Get Trumped In November?

The weeks ahead will feature almost nonstop presidential election news, debates, commercials and polls in a historic election.

Simply stated — there is much on the line in the choice between President Donald Trump and Democratic challenger Joe Biden, particularly for the economy and those in the insurance and finance industries. As this issue went to press, Biden held a commanding lead across most polls and swing states.

Should Biden deny Trump a second term, the former vice president is expected to reverse many key economic policies. A pair of regulations that are likely to be targeted:

» The Securities and Exchange Commission’s Regulation Best Interest. Reg BI imposes a “best interest” standard of conduct on broker-dealers when making a recommendation to a consumer for any securities transaction or investment strategy involving securities.

» The Department of Labor investment advice rule. The rule 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.

From the industries’ points of view, the new rules are a positive step toward a harmonious best-interest standard it can live with. On the other side, Democrats and consumer advocates say the lack of consequences make the best-interest principles meaningless.

A Matter Of Timing

There is a section titled “Guaranteeing a Secure and Dignified Retirement” in the recently released 2020 Democratic Party platform draft. It outlines the party’s commitment to reversing the best-interest rules.

“We will take immediate action to reverse the Trump administration’s regulations allowing financial advisors to prioritize their self-interests over their clients’ financial well-being,” the draft stated.

If victorious, a commitment by the Biden administration to act fast could change the game.

One of the main reasons the industry rules have veered left and right for at least a decade is their place on the priority list, which is to say, decidedly low.

Specifically, it took the Obama administration until April 2016 to publish a tough fiduciary rule that was years in the works. The DOL initially put out a version of the rule in 2010, only to withdraw it amid fierce industry criticism.

The DOL under Obama claimed commission-based “conflicted advice” costs investors $17 billion annually, a figure widely disputed within the industry.

Despite the lengthy delays, some aspects of Obama’s fiduciary rule went into effect in June 2017. A federal appeals court later tossed out the entire rule. By then, the Trump administration was enduring its own delays completing a replacement rule.

It wasn’t until 2020 — under Trump’s third secretary of labor nomination, Eugene Scalia — that the DOL finally completed work on the investment advice rule. As this issue went to press, the DOL had wrapped up a comment period that generated sharp criticism of the rule.

In a comment letter, Morningstar said that the DOL could go further to protect all investors receiving rollover advice in a variety of contexts. The DOL should revisit the “regular basis” prong of the five-part test to either eliminate this requirement or presume that it is satisfied in the context of a rollover.

Nonetheless, Fred Reish, partner at Faegre Drinker Biddle & Reath, said he expects the rule to be published in the Federal Register around Jan. 1, 2021. Should there be a change of administrations, it would put Biden in the same position as Trump was in January 2017: inheriting a rule on the books, but not yet effective.

And Biden would likely do what Trump did and issue a memorandum ordering a departmental review of the rule.

Why It Could Be Different

The seeds of a rule to tighten regulation of product sales with retirement dollars can be traced to the Bush administration nearly 15 years ago. While civil servants often serve through multiple administrations, they issue rules at the whim of the ideology in power.

Hypothetically, a Biden administration could break through with a definitive rule early in its tenure. In addition to its stated urgency expressed in the party platform, the administration could find sympathetic partners in Congress.

Polling and pundits give Democrats an even-money shot at taking control of the Senate, which would turn committee chairs over to lawmakers such as Sen. Patty Murray, D-Wash. Ranking member of the Senate Health Education Labor and Pensions Committee, Murray ripped the DOL investment advice rule.

“It simply does not do enough to make sure clients’ interests come first,” she wrote in a letter. “Like so much of our retirement policy, the fiduciary standard needs a serious update. And the frustrating thing is we had one, but the Trump administration stood by and let it get struck down in court and refused to fight for the Obama-era rule even though every previous court had upheld it.”

While Congress can override an agency rule, it almost never happens. Instead, lawmakers can stymie legislation by holding hearings, questioning agency heads or withholding funding. Any administration wanting to enact permanent rules changes is certainly helped by a sympathetic Congress.

States’ Rights

So the runway is clear for Democrats to take over investment advice rulemaking, right? Not quite. If it were that easy, these rules would probably already be consistent across the board.

Instead, the state insurance departments are exercising their autonomy over insurance regulation. And they are quickly moving to a best-interest standard set out by the National Association of Insurance Commissioners in a February model law.

Since then, Arizona and Iowa have adopted the rules, which establish a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.

As of press deadline, regulators from Idaho, Ohio, Rhode Island and Kentucky said they are working on updating their annuity rules based on the NAIC model.

Eric Arnold, an insurance and finance lawyer with Eversheds Sutherland, said the big news is the rule’s shift from suitability.

“The large font headline is that it moves from suitability to best interest,” Arnold said. “What’s required now with respect to recommendations is rather than making sure that the recommendations are suitable, the recommendation has to be in the best interest of the consumer without placing the producers’, or the insurers’ financial interests ahead of the consumers’ interest.”

‘A Significant Year’

There are many weeks to go until Nov. 3, but industry executives say plenty is at stake when it comes to the regulatory landscape.

David Wolfe, counsel at Advisors Excel, the nation’s largest insurance marketing organization, said the Trump administration’s recasting of regulations helped open the door a bit wider for annuities in the retirement market.

“This was already shaping up to be a significant year in our industry,” said Wolfe, who hosted the webinar. “We got broad changes to state and federal rules and regulations covering sale of annuities, new legislative initiatives intended to broaden the availability of annuities in retirement accounts.”

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.