After losing the U.S. Senate in the 2014 mid-term elections, the Obama administration faced a political pickle. How could it advance its agenda without the support of a Republican-controlled House of Representatives or a newly controlled Republican Senate?
With some clever political maneuvering, the administration went to its federal executive departments, including the U.S. Department of Labor, and tasked them to promulgate the progressive rules pursuant to the Administrative Procedure Act before the next election. Voila! The DOL made the Fiduciary Rule effective last June, even though it wouldn’t go into effect until April 2017.
Why the rush? The rule’s effective date in June 2016 prevented it from being undone by either the Congressional Review Act or executive order.
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While every financial professional should support the concept of acting in the best interest of the client, the DOL’s fiduciary rule is flawed for reasons too numerous to explicate here. Especially flawed is the idea that receiving a commission is a material conflict of interest. Even though study after study proves that commissions paid to a financial professional from a company (not directly out of the client’s pocket) are more economically beneficial to a client versus the client having to pay an annual fee (out of his or her pocket), this Rule is not about conflicts of interest or even retirement investors. It is about one thing and one thing only, control.
Let’s go back in time to 2005 when FINRA released Notice-To-Members 05-50, which “gently” reminded broker-dealers of their supervisory duties regarding fixed-index annuities.
At the time, FIAs were absorbing a great deal of the annuity market share at a faster than expected pace. We all asked the same question, “Why would FINRA care about regulation of an insurance product?” While reasonable to ask, asking was naïve. The government doesn’t care about what it controls, it cares about how much it controls. Some proposed the “solution” of insurance producers, who sell insurance products, to go get securities-licensed so that they could be to be supervised by a securities firm so they could not sell securities, but insurance.