With so much time and attention now focused on the Department of Labor’s fiduciary rule, it’s easy to lose sight of the fact the numerous other regulatory and legislative proposals are being advanced that could impact the industry.
Top-of-mind for the National Association of Insurance and Financial Advisors, which held its annual meeting in Las Vegas Sept. 17-19, are tax reform, an SEC fiduciary rule, and state-sponsored retirement plans that could threaten private-sector solutions.
These and other federal and state proposals got a full airing at a “Legislative Forum,” the closing general session on Monday presented by NAIFA’s government relations team.
“There are numerous proposals that require our vigilance,” said NAIFA Senior Vice President of Federal Government Relations Diane Boyle. “There are, in fact, nearly 2,000 bills in Congress that are of interest to NAIFA members. There are also countless regulatory proposals addressed on behalf of NAIFA members and the clients [advisors] serve.”
Revamping the tax code
Deciding which legislative and regulatory proposals (among them 796 financial service bills) take priority and how to strategize around them can be a challenge. But one rises above the rest in terms of its scope and potential impact: tax reform legislation being drafted under the stewardship of House Speaker Paul Ryan.
“With Paul Ryan, you have a speaker who is deeply, personally invested in doing tax reform; and a chairman who has just released a blueprint for a major tax overhaul,” says Pat Raffaniello, a principal of Raffaniello & Associates. “We’ve been working with House committee members and staff to make sure they understand how the legislation will affect our members and our clients.”
Details of the legislation haven’t been outlined, but the blueprint broadly aims to simplify the federal tax code and broaden the tax base, in part by eliminating special tax rules and exemptions that would lower income tax rates. To stay revenue-neutral, the bill may include a much-discussed proposal: incorporating a value-added tax or consumption tax assessed on a product at every stage or production and at final sale. The VAT is widely used in the European Union, among other developed countries.
“How precisely tax reform will impact life insurance, annuities [and] retirement savings is all still pretty unclear, except we do know that our products would be impacted,” says Danea Kehoe, a NAIFA outside counsel at DBK Consulting. “At this point, we just don’t know exactly how.”
While the House, Ways and Means Committee is crafting a bill to move the blueprint forward, whether the proposal gets past the Senate remains an open question. NAIFA Director of Government Relations Judi Carsrud says much will depend on the outcome of the 2016 elections in November.
If Republicans take control of the White House and both houses of Congress, it will be “a lot easier” to advance tax reform. But if the Democrats keep the White House and get a majority in the Senate, as many expect, there will have to be compromises.
Potentially among them: a net increase in tax revenue, more progressive income tax brackets, greater deficit reduction, and much-needed investments in infrastructure like roads and bridges. The first of these could be a deal-killer for the GOP, but one nonetheless the Democrats may insist on.
The Democrats’ “idea of tax reform is that there should be a tax increase,” says Raffaniello. “Senators Bernie Sanders and Elizabeth Warren have moved [Democratic Presidential nominee] Hillary Clinton pretty far to the left” on this and other issues.
Also on the radar for NAIFA members are tax reform initiatives in the heartland. Some state legislatures have introduced bills designed to close large budget gaps that could impose levies on industry products and services.
NAIFA Counsel and Vice President of Government Relations Gary Sanders noted that NAIFA has been successful in “fending off” these proposals, but warned that the industry needs to remain on guard against similar proposals.
DOL vs. SEC fiduciary rules
Turning to the Department of Labor’s fiduciary rule, unveiled last April and set to take effect in April 2017, NAIFA’s government relations team touted the industry’s success in helping to shape final regulations that, while still unacceptable to stakeholders, is superior to what the DOL had earlier contemplated.
Scott Sinder a partner at Steptoe & Johnson and outside counsel for NAIFA, said an earlier draft of the rule was “a lot worse for us” and that industry players would not likely have been able to comply, forcing many of them from the retirement space. Notable among the improvements to the final rule was a shifting of reporting and administrative burdens from advisors to financial institutions — broker-dealers, registered investment advisors, independent marketing organizations and insurers — authorized to sign off on the rule’s best interest contract (BIC) and exemption. Another improvement: special provisions for the sale of proprietary insurance products.
“There are a few extra steps NAIFA members will have to take to sell these proprietary products,” says Kate Jensen an associate at Steptoe & Johnson. “Also, variable annuities, like any other product, can satisfy the best interest standard. NAIFA advisors can take a lot of comfort in that.”
NAIFA members may be less sanguine at the prospect of a long-expected fiduciary rule from the Securities and Exchange Commission, which Congress called on to study as part of the Dodd-Frank Act of 2010. In the wake of the DOL’s rule, the rollout of an SEC fiduciary rule looks more likely. Sanders noted the SEC’s regulatory calendar for 2017 calls for a published proposal “as early as next spring.”
Carsrud added, however, that the SEC views the DOL rollout as a “live experiment” to watch and learn from, and that the commission will likely move slowly towards a final rule.
Steptoe and Johnson’s Sinder agreed.