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Credit Suisse cites impact of fiduciary rule on insurers

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Washington, D.C. — The comment period closes today (Monday) on a regulation proposed by the Department of Labor that, if imposed in its present form, would have a sweeping impact on insurers, agents and advisors.

The DOL expects thousands of comment letters, and insurers and agents, as well as industry lawyers and trade groups, have been working on comprehensive letters since the 900-page proposal was first published for comment in April.

For example, in a virtually unprecedented move, the American Council of Life Insurers announced Friday that it will hold a teleconference Wednesday to explain to reporters its decision to brief them on the implications of the rule.

The ACLI explained that the proposal, if adopted in its present form, could “drive up the cost of financial advice at a time when it is most needed by millions of Americans and small businesses.”

Among other concerns, the ACLI said it could reduce choices in retirement plan marketplace and make it extremely hard for people to access annuities, which represent the sole means available in the marketplace today for retirees to secure guaranteed income for life.

The next public step will be a public hearing the week of Aug. 10, followed by publication of a hearing transcript. After the transcript is published, an additional two-week comment period will open.

Significant criticism of the proposal has been voiced in Congress, and there are several bills, either introduced or cases where members of Congress have said they plan to introduce, that would sideline the proposal in one way or another.

One significant initiative is an effort to defund work on the proposal contained in bills reported out by both the House and Senate Appropriations Committee.

However, in a comment that represents a consensus, Thomas G. Gallagher, an analyst at Credit Suisse, said that, “We believe that the significant backing by the White House will ultimately result in the adoption of the proposal without much dilution to the current version.”

Gallagher said that the DOL’s primary goal “is to reduce the costs associated with individuals who are rolling money out of employer sponsored retirement plans and particularly costs associated with conflicts of interest.”

The final rule could go into effect by next July as the Obama administration works to ensure that this signature consumer protection is in place before he leaves office in January 2017.

Thomas E. Perez, DOL secretary, has made clear that the agency and the administration will listen carefully to industry concerns, and modifications are seen as likely. But the core principles of the rule are seen as a remaining impact in any final regulation.

Meanwhile, industry lawyers and analysts speculate that that in order to win the industry’s grudging support, it is more likely to go into effect as late as December 2016. And, application of certain provisions could be further delayed, industry lawyers and analysts suggest, in order to reduce congressional pressure to substantively modify or kill a final rule.

According to industry lawyers and analysts, two key areas will be the sale of variable annuities and on the system used to compensate agents and advisors selling insurance and investment products into retirement accounts covered by the Employee Retirement Income Security Act of 1974 (ERISA).

Of equal concern is that it has the potential for investors to seek redress from insurers, agents and advisors through the court system or, perhaps through arbitration, if it can be proven that the issuer or agent/advisor didn’t act in the best interest of the customer through a so-called “best interest contract.”

The issue has been seeking to stave this off for the past 10 years.

Gallagher sees the rule as hurting specific companies, but “only modestly negative for most.”

Gallagher sees the main areas at risk as industry variable annuity sales, certain proprietary products sold through captive distribution, as well as distribution-related revenues and expenses more broadly.

“And while fixed income annuities are currently not being moved to the new fiduciary contract, these products may still be negatively affected under the new impartial conduct standards,” which include acting in the interest of clients and  not accepting unreasonable compensation, Gallagher said.

Another reason for the concern is the “best interest contract” provision that the proposal envisions as ensuring that agents, advisors and brokers can receive commissions for selling into retirement plans.

The National Association of Insurance and Financial Advisors is working on several fronts to derail the regulation. But one of its key concerns is the impact on compensation.

“Complying with the BIC exemption is going to be a little bit harder for broker-dealers and insurance agents,” according to Stephen P. Wilkes of the Wagner Law Group. Wilkes said he believes “the disclosures are going to be burdensome because I think it will be difficult to eliminate all the incentives and programs that are typically a part of the ‘pay grid’ or compensation formula used to pay advisors and agents in a manner that fits under the exemption. So, I know the insurer industry will be speaking out very strongly on this aspect of it,” Wilkes said.

Another is the broad scope of the rule. Sure to be brought up in industry comment letters are provisions that impact insurer promotion of their own health, life and disability products.

As cited in recent congressional testimony by Kent A. Mason, a lawyer at Davis & Harman, the proposal would convert the promotion by an insurer (or its agent) of the insurer’s own group health, life, and disability insurance products to small businesses (or their fiduciary, such as a broker) or employees (of employers of any size) into fiduciary acts even in circumstances where no plan assets are held in trust.

In other words, Mason said, an insurer would be treated as a fiduciary with respect to certain welfare benefit plans simply by reason of promoting its own products.

“If the promotion of these insurance products to small businesses (or their broker/fiduciary) or employees does become a fiduciary act, (1) the insurer would be vulnerable to a lawsuit simply for selling its own product without sufficiently considering the advantages of competitors’ products, and (2) it is unclear whether a prohibited transaction exemption would be available to permit the continued sale by an insurer of its own insurance products to small businesses,” Mason said.

See also:

NAFA: Congresswoman Ann Wagner will ‘punch a bear’ to halt DOL


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