DOL Fiduciary Rule Nears the Finish Line

As 2015 drew to a close, intense debate continued regarding the Department of Labor's planned release in the first half of 2016 of its rule to amend the definition of fiduciary under the Employee Retirement Income Security Act.

While it's safe to say that all sides have been aired — and re-aired — as to how DOL's rule will negatively impact retirement savers, particularly low- and moderate-income ones, opponents of the rulemaking argue that it will have a particularly devastating impact on annuities and those who sell them.

Since the comment period ended in late September on DOL's planned rule, the full House passed in late October Rep. Ann Wagner's bill, H.R. 1090, the Retail Investor Protection Act, which requires DOL to wait to issue its rule until the Securities and Exchange Commission weighs in with its own fiduciary plan.

But the Obama administration didn't waste time in stating after Wagner's bill passed that it would be dead on arrival if it reached the president's desk.

Labor Secretary Thomas Perez noted at a Brookings Institution event in early October in Washington that while DOL was bracing for legal challenges to its fiduciary rule, DOL's "goal is to help everyone comply," and that the department will "not engage in the gotcha game" when it comes to compliance. Perez has also stated that he's "confident" DOL will be making changes to "improve" the rule.

One hundred Democrats also sent a letter to Perez the same month saying that before issuing the final rule they'd like him to lay out the specific changes that would be made to it. But Perez rebuffed that request, stating that to do so would be "irresponsible," as DOL was still drafting changes to it.

Meanwhile, SEC Chairwoman Mary Jo White said in early November that while the SEC is "flat-out doing" its own fiduciary rule, she couldn't say when that rule would be proposed, stating, once again, that "it's not a short, quick, uncomplicated" rulemaking. White said SEC staff is being careful to calibrate a fiduciary rule that "raises the bar of compliance [but] does not have unintended consequences."

The Lobbying Picks Up Pace

Broker-dealers and small businesses headed to Capitol Hill in November to lobby against DOL's rulemaking. At the annual Commonwealth Financial Network conference, held in mid-November in Washington, Rep. Mick Mulvaney, R-S.C., called DOL's planned fiduciary reg "awful," and urged advisors to start lobbying their senators to slow down DOL's plan.

"Go to the Senate, knock on the door and see them," Mulvaney, a member of the House Financial Services Committee, told the 1,300 Commonwealth attendees. The full House, he said, "has done its work" with the passage of Rep. Wagner's Retail Investor Protection Act.

Such lobbying could be effective, as Rep. French Hill, R-Ark., stated in November at SIFMA's annual meeting in Washington. He said "discussions" are taking place in the Senate to introduce legislation similar to Rep. Wagner's bill.

Hill argued that "the existing rules are in place" at the SEC and FINRA "to handle this [fiduciary] issue," adding that the SEC "should be doing this [fiduciary rulemaking] with FINRA."

Both Hill and Rep. David Scott, D-Ga., told reporters at the SIFMA event that they would recommend that language to defund DOL's rulemaking be included in the conferees report on the omnibus spending bill, which was to be debated on Dec. 11.

Scott asked White during her testimony at a House hearing on the SEC's agenda in late November why she was allowing the DOL to "take over" the SEC's "clear" authority under Section 913 of the Dodd-Frank Act to write a uniform fiduciary rule for brokers and advisors.

White responded: "I don't view it that way. I think, again, [DOL and the SEC] are separate agencies," and that DOL has "authority in the ERISA space." Dodd-Frank, she added, did not mandate that the SEC write a fiduciary rulemaking.

The Annuities Issue

As to the DOL rule's impact on annuities, Cathy Weatherford, president and CEO of the Insured Retirement Institute, told me in an email message that DOL's plan would limit savers' lifetime income options. "The rule as proposed removes variable annuities from the scope of Prohibited Transaction Exemption 84-24, which for more than 30 years has been used to make lifetime income available to savers through IRAs," Weatherford said.

At the same time, she said, the best interest contract exemption, or BICE, which as currently written requires a client to sign a contract before getting advice, should "be changed to ensure it does not impede the availability of lifetime income products to savers."

Weatherford said IRI would like to see BICE's current "unworkable disclosure requirements" replaced with those in place under existing DOL, SEC and state insurance rules.

The "best interest" definition, she said, should also be revised "to make clear that financial professionals and firms must always put their clients' interests first, but do not have to completely disregard legitimate business interests."

BICE should also be modified to "clearly" state that the exemption "permits the sale of proprietary products or a limited range of products, as well as the use of commission-based compensation and other customary compensation practices."

Another modification, she continued, should be modifying BICE's "reasonable compensation" rules for VAs to allow advisors and firms to "appropriately consider both the value of the advisor's services and the value of the guarantees, benefits and other features provided by the product."

The National Association of Insurance and Financial Advisors argues DOL's plans will "result in fewer annuity products being sold," said Sheila Owens, NAIFA's president, "which is especially harmful to low- and middle-income consumers." The DOL proposal's "structure for annuities is particularly complex and confusing, which will make offering these products more difficult and costly."

NAIFA told DOL in its comment letter that there are "only three ways to receive guaranteed income in retirement — annuities, Social Security and defined benefit pensions — which explains why annuity products have always been trumpeted by the Department."

Somewhat ironically, NAIFA said, the Department's proposal "foists a heightened burden on advisors who offer annuity products to non-fee-paying clients," for example, "splitting up rules and requirements for annuities by both investor type and type of annuity product), which will only make offering these products more difficult and costly."

Notably, NAIFA argued, "high-end, fee-for-service providers (many of whom, not surprisingly, support the Department's proposal) do not sell annuity products because their client base can self-annuitize extensive investment portfolios.

On the other hand, low- and middle-income Americans rely heavily on annuity products of all kinds to provide them income security in retirement. These products should continue to be available, and to be available in a broad enough range (i.e., fixed, indexed, variable) to preserve investor choice and provide sufficient options for individual investors' particular needs and retirement savings goals."

Robert Bloink, professor at Texas A&M School of Law, and William Byrnes, associate dean, noted in a recent blog for ThinkAdvisor.com, that additional classes of annuity products "may be pulled under the umbrella of the new, more strict, fiduciary standards."

Advisors who offer annuities, the two wrote, "need to be aware of the proposed revisions that the DOL is currently considering — especially since they potentially involve holding the broad class of fixed indexed annuities to the heightened standards previously reserved for variable annuity products."

From a planning perspective, the two said, advisors would need to take additional precautions "to ensure that sales practices with respect to these popular products comply with the fiduciary rules to avoid liability." However, "compliance with the new prohibited transaction exemptions has the potential to save these annuity sales for advisors."

— Read "DOL Fiduciary Rule Is 'Biggest Change That We'll Go Through': Pershing" on ThinkAdvisor.