Insurance agents and brokers are awaiting with bated breath a revised proposal from the Department of Labor (DOL) that would establish new rules for sale of investment products to beneficiaries of company-sponsored retirement plans and IRAs.
The industry universally fears that such a regulation, if finalized, would eliminate commissions as a source of broker-dealer compensation for such accounts.
They believe that this would potentially “price out” the majority of American IRA holders from affordable financial advice.
The proposal was first published for comment in October 2010, and has generated a huge amount of controversy.
The DOL and the Employee Benefits Security Administration (EBSA) plan to publish the new proposal for comment in July, according to the agency’s updated regulatory agenda, disclosed in late December.
The agency is now in the process of updating and expanding the economic impact statement seen as critical to winning court support for the proposal if any interested parties seek to challenge it based on the fact the agency did not properly weigh the potential cost of the proposal on the industry.
Moreover, an agency official said that the decision of DOL chief Hilda Solis to step down will not affect EBSA’s work on the re-proposal.
Agency officials reiterated that the regulation is needed to “draw a clear line between the sort of investment advice that is fiduciary in nature and, therefore, covered by the regulation and other types of communications that should not be treated as fiduciary communications.” For example, agency officials cite several comments on the original proposal that expressed concern that the earlier proposal would treat service providers as fiduciaries merely for giving customers some basic investment education or plan information. “That was never the Department’s intent and the re-proposed regulation will make that clear,” an agency official said.
And, the DOL is not the only agency examining the standards investment advisors must use in selling investment products to consumers.
The Securities and Exchange Commission (SEC) has also been evaluating how to establish a uniform fiduciary standard on the sale of investment products.
However, Mark Smith, a partner at Sutherland, Asbill & Brennan in Washington, joins a number of industry officials and lawyers in predicting that the DOL is much farther along in its efforts to update the standards investment advisors, such as insurance agents and brokers, must use in selling investment products. The DOL confirmed this in its December regulatory update.
Knut Rostad, president of the Institute for the Fiduciary Standard, contends that all the DOL/EBSA is doing is “fairly and comprehensively applying the standard as originally envisioned in the legislation.”
Rostad said that is “the point that is being overlooked” in all the controversy generated by the DOL/EBSA rule.
“It is totally inappropriate to say they are ‘redefining’ the standard,” Rostad said. “That is a bunch of malarkey.”
But, Smith disagrees.
“All the statute [ERISA] says is that you are fiduciary if you provide investment advice for a fee,” Smith said.
“The statute on its face is neither broad nor narrow,” he explained. “We should interpret words or statutes on what they mean in their legal sense, and not attribute broader or narrow construction to them,” he said.
The industry consensus is that the DOL will publish a revised rule for comment sometime in the third quarter, perhaps as early as July.
Presently, the DOL and EBSA are working with the Washington-based Financial Services Institute (FSI) on preparing a regulatory impact analysis that is more comprehensive than the one contained in the original proposal, FSI officials said.
At the same time, Ken Bentsen, executive vice president of public policy and advocacy for the Securities Industry and Financial Markets Association recently said that the SEC plans to issue a “concept release,” which will also likely include a request for information, in the first quarter regarding its rule to put brokers under a fiduciary mandate.
What the SEC wants is more feedback on its cost-benefit analysis on its fiduciary rule.
But, Smith and other industry officials believe that the DOL is much further along on its work on a revised fiduciary standard.
The DOL or EBSA proposal has generated a great deal of debate.
The current standards have been in effect since 1974. But, DOL officials contend in pursuing the new standard that times have changed.
As explained by Sutherland in an investment alert, the DOL believes that since 1975, ERISA retirement plans have shifted from predominantly defined benefit to predominantly defined contribution.
DOL officials argue, the Sutherland alert explains, that the financial markets have also changed during that time and have become more complex.
“As a result, the investment practices of plans, along with their relationships with their advisors, have changed,” Sutherland officials say in defining why DOL and EBSA officials see a change as necessary, because, “In this more complex environment, plan fiduciaries seek out impartial assistance and expertise from consultants, advisors and appraisers to advise them on investment-related matters.”
As a result, the Sutherland paper says, DOL and EBSA officials say that in structuring their relationships with plans, “advisors can too readily take advantage of the [current] five-part test to avoid fiduciary status.”
The DOL proposes to replace the existing five-part test for an exemption from the fiduciary standard with a two-part definition subject to a series of carve-outs, according to Smith.
He cites language in the proposal justifying it as noting that, in recent years, non-fiduciary service providers — such as consultants, appraisers, and other advisors — “have abused their relationships with plans by recommending investments in exchange for undisclosed kickbacks from investment providers, engaging in bid-rigging, misleading plan fiduciaries about the nature and risks associated with plans investments, and by giving biased, incompetent and unreliable valuation opinions.”
Yet, the proposal states, “no matter how egregious the abuse, plan consultants and advisors have no fiduciary liability under ERISA, unless they meet every element of the five-part test.”
The proposal has generated a large amount of bickering. It has generated 202 comment letters, and 39 organizations testified at a public hearing EBSA held on the issue last year.
In regards to SIFMA, which represents hundreds of securities firms, banks and asset managers, 94 members of Congress have sent letters to the DOL raising concerns with the proposed regulation. Seventy representatives and 24 Senators have sent a letter, including 62 Democrats and 32 Republicans.
The DOL’s previous fiduciary proposal was “contrary to where Congress wanted the SEC to go in Section 913 of Dodd-Frank,” Bentsen said. Section 913 “makes it clear that you could have dual models under a uniform standard of care,” however, “the way the DOL is moving would eliminate the ability to have a commission-based model for ERISA accounts.”
Robert Smith, president of the National Association of Insurance and Investment Advisors (NAIFA), said NAIFA is concerned about the impact of the proposal on people who need advice on IRAs.
Currently, Smith said, “IRAs are not qualified plans and thus are outside the current ‘enforcement’ jurisdiction (they do have ‘definitional authority’) of the EBSA, the DOL agency which oversees ERISA. We are concerned about the impact of the proposal on a person’s ability to seek advice from a member of NAIFA on how to make use of IRAs.”
“Under the DOL proposal, many independent financial advisors might be forced to exit the IRA and company-sponsored retirement plan businesses, rather than face the onerous costs of restructuring their service offerings to suit the new rule,” argues Christopher Paulitz, senior vice president, membership & marketing for the FSI.