On NAIFA’s plate: tax reform, SEC rule, state retirement plans

By Warren S. Hersch

September 20, 2016 at 11:32 AM

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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.

"The SEC is not in a hurry to roll out their own fiduciary rule," he said. "The commissioners want to make sure that anything they do will enhance, not impede, our ability to promote retirement savings. So I think this gives us time."

Time, he added, for several industry lawsuits underway against the DOL — including an ACLI/NAIFA complaint consolidated into a 9-party suited filed with a federal district in Texas — to play out. Among the 8 counts detailed in that complaint, NAIFA is most focused on one: vacating a provision of the rule that provides for a "private right of action" against institutions alleged to have violated the DOL's rule's best interest standard. Gutting of this provision, said Sinder, would "remove a lot of the tension undermining implementation of the rule."

Bubbling up in the states

The industry's anxieties would also be lessened if other retirement-related government efforts — bills introduced or enacted in 25 state legislatures that would create state-sponsored retirement plans — didn't conflict with their counterparts in the private sector.

NAIFA's Carsrud said that retirement savers would be better served if the states instead promoted financial literacy and education, adding that private, employer-sponsored plans "work well" and provide adequate protections for employees under ERISA law.

Ironically, she noted, at a time when the DOL is seeking to extend its authority through its fiduciary rule, the department has no plans to oversee the proposed state-run plans. As a consequence, employees in these plans may not enjoy an employer match to their contributions, as do workers enrolled in ERISA-governed defined contribution plans like 401(k)s.

This difference could, said Jensen, create "an uneven regulatory playing field" between public and private plans. In this environment, employers may navigate to less costly state-run plans, to the detriment of private sector options.

Of the 6 states that have enacted legislation creating state-run plans, none has become operational. And, says Sinder, there remain "serious questions" about their tax status, regulation under ERISA and cost in setting up the plans.

"We don't think [the states'] approach will help address the shortfalls in retirement savings we're seeing in the U.S. today," said NAIFA's Sanders. "These proposals are focused on improving access to retirement products, which isn't a problem at all. Anyone can now walk into an advisor's office and come out with a retirement plan that fits their needs."

If the industry has anything to the say about, most of these state retirement initiatives won't be realized. In concert with its state associations, said Sanders, NAIFA has been "holding its own," successfully lobby state lawmakers to jettison proposals or consider alternatives that align with industry positions.

Two states, Washington and New Jersey, have enacted NAIFA-supported legislation focused on consumer education and connecting more employers with private retirement market solutions. NAIFA is also lobbying lawmakers to simplify set-up and administration for existing private sector plans, prompting more small businesses to sponsor them and increase the employer match to participants' contributions.

Steptoe and Johnson's Sinder warned, however, that simplification can go too far.

"The danger in trying to simplify and streamline is you eliminate a lot of the different options the market has created," he said. "We need to be promoting more options for small employers who have very different needs than large employers. This needs to be factored into [any legislative proposal]."

NAIFA's Boyle added that future Congressional legislation designed to promote retirement savings will not likely result in changes to the DOL rule. Industry stakeholders will, rather, have to rely on the courts for hoped-for modifications.

Proposals to protect seniors

Legislation already in sync with industry positions can be found in another area: laws designed to protect senior citizens against fraud and financial exploitation. NAIFA Director of State Government Relations Steve Kline said senior financial protection initiatives are "in play now" at both the federal and state levels. These include the Congressional "Senior Safe Act," which passed the House in July. The bill would make it easier for financial advisors to report financial abuse of the elderly; and it would protect financial institutions and advisors from legal liability if they disclose financial exploitation of seniors to regulators.

NAIFA and the North American Securities Administrators Association (NASAA) have also crafted for state lawmakers' consideration model laws dovetailing with the House bill. And, NAIFA backs a rule proposed by the Financial Industry Regulatory Authority that would allow or encourage financial institutions to put a temporary hold on transactions they deem to be potentially fraudulent. To help refine the rule, NAIFA collaborated with NASA the Securities Industry and Financial Markets Association (SIFMA).

"It's a good rule," said Michael Hedge, a director of government relations for NAIFA. "The rule is voluntary, but it encourages reporting if you suspect there's something gone wrong."

State proposals modeled on the federal Achieving a Better Life Experience Act of 2013 are also in tune with NAIFA's legislative aims. The ABLE Act amends Section 529 of the Internal Revenue Code to create tax-advantaged savings accounts for individuals with disabilities.

These tax-advantaged savings accounts can be used to cover qualified disability expenses such as education, housing and transportation. The law also supplements, but does not replace, benefits provided through private insurance, Medicaid, the Supplemental Security Income program, the beneficiary's employment and other sources.

NAIFA's Kline said that 46 states to date have adopted their own version of the federal ABLE Act.

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