Kitces: Salespeople Should Have Gotten a Break in DOL Fiduciary Rule

As the Labor Department fights lawsuits from the insurance industry over its new fiduciary rule, which was released in late April, industry officials are weighing in on what the outcome may be.

The "Salesperson Exemption" that XY Planning Network proposed in its comment letter to Labor on its new rule would have helped buffer the rule from legal challenges, Michael Kitces — the advisor, blogger and co-founder of XYPN — said in an interview with ThinkAdvisor.

XYPN, a fee-only planning platform, suggested that Labor enact a Prohibited Transaction Exemption, PTE 2024-01, for sales agents and their affiliated firms selling investment products.

The "Salesperson's Exemption," XYPN said, "would provide a pathway for sales agents to not be subject to the Department's fiduciary obligations under the Retirement Security Rule, and in exchange would be limited in holding out to the public using certain advisor titles, marketing certain advice services, and having a proactive disclosure obligation to communicate that they are operating solely in a sales capacity."

Others in the industry have said the rule can withstand legal challenges without the exemption.

As it stands now, the Federation of Americans for Consumer Choice and several independent insurance agents filed for a preliminary injunction on May 22 in federal court, seeking to force Labor to delay the rule's implementation.

On May 24, nine insurance trade groups filed a lawsuit against Labor's new rule in the U.S. District Court for the Northern District of Texas.

Labor must file its response to that suit by June 28, while the insurance groups have until July 12 to file a reply.

ThinkAdvisor caught up with Kitces to discuss the pending litigation and how it may end up, given the way that Labor structured its new rule.

THINKADVISOR: Insurance trade groups have filed lawsuits against Labor's new rule. Do you think they have a chance of going anywhere?

MICHAEL KITCES: We still have concerns about whether [the lawsuits are] going somewhere.

To me, the crux of Department of Labor 1.0 on this [fiduciary issue] was that DOL looked at all these different financial services people who were coming at retirement plans, some of whom are advisors and some of whom are product salespeople from various industry channels and providing retirement recommendations for rollovers into their company products.

DOL said, "This is terrible. All these people are giving recommendations to retirement participants and they're not acting like fiduciaries; we need to regulate them like fiduciaries."

So they tried to capture one-time rollover recommendations into advice and then expand it to IRAs and then capture the full range of people who are providing recommendations to retirement plan participants.

This is to me some version of what the industry has talked about for the better part of 10 years — a uniform fiduciary standard that applies to all investment advisors and brokers, and, even in the case of DOL, advisors, brokers, insurance salespeople.

I would note that from the XYPN perspective, we've opposed uniform fiduciary standard from the start, because there really is such a thing of a salesperson wanting to sell a product, and you have to allow salespeople to exist. You can't regulate them out of existence.

Labor has said that this time around they've addressed the 5th Circuit's concerns about the previous 2016 rule. So where do you stand on Labor's new rule?

We think it made progress; our position from this on the start is the fundamental way that you regulate the salespeople's advice. It's that you give the salespeople a choice. If you market yourself as an advisor, we're going to regulate you like one. And if you don't act like an advisor, you can continue to be a salesperson and not be subject to these rules.

You don't regulate salespeople like advisors; you create a brighter, cleaner line between sales and advice. And you are only regulated like an advisor when you act like an advisor.

So to that end, I do think the Department of Labor made progress. They essentially structured their rule framing to say: "If a retirement investor would reasonably believe that the recommendations that are being provided are something they could rely upon, i.e., that it's advice, then the advisor or salesperson is subject to Labor's rule."

Conceptually, I think it's on the right track. … I think DOL is on the right track in saying, "Well, this rule only applies to people who are holding out as advisors and creating an expectation their advice can be relied upon as an advisor in the first place."

But in and of itself, that's still fairly hard to regulate. That means the Department of Labor is going to get sucked into regulating firms' marketing processes, which is, on the one hand, an important aspect of regulation, but relatively tough to do in practice.

XYPN proposed a "Salesperson's Exemption" in its comment letter to DOL regarding the 2023 rule. Please explain.

We proposed an entire exemption for salespeople that … just acknowledges that salespeople are outside of the Department of Labor's jurisdiction; it's when you show up as an advisor when you should be regulated as a fiduciary.

But we tried to provide a much brighter-line safe harbor for the salespeople to use because then it's quite straightforward when you are challenged in court that you are trying to regulate salespeople as fiduciaries, you can say: "No we're not. There's an exemption, in the rule, for salespeople."

So the Department of Labor chose not to adopt that; they believe their existing framework is robust enough.

I do think [DOL is] on the right track in saying you have to look at how the salesperson communicates their services as to whether they're creating an expectation of advice in the mind of the consumer.

But it's a difficult thing to implement from a regulatory enforcement end. And I think that's what's opened the door for the industry to say, 'This is still too murky and it still looks like the Department of Labor is trying to regulate salespeople they don't have jurisdiction over.'

So we'll see if they prevail. We do think DOL was directionally right on this.

We're thrilled to see titles and marketing actually become part of the regulatory framework, but it's still a challenging thing to regulate … which is why we thought a safe harbor on salespeople would make the Department of Labor's rule more defensible.

They chose not to adopt our exemption proposal so we'll see if their original rule is defensible enough. I hope it is; we support where it went.

I just do remained concerned that the [insurance] industry may be able to prevail in saying "this [rule] is extending too much to salespeople when the DOL really only has jurisdiction to regulate fiduciaries in the first place."

One of the central arguments in the insurance groups' lawsuit against Labor is that Labor is attempting to regulate salespeople.

The concluding section of [the insurance groups'] opening introduction to the case, … draws direct parallels to the idea that the DOL is applying fiduciary rules to non-fiduciary salespeople, "by heaping significant fiduciary burdens on garden-variety sales conversations."

A rather ironic claim coming from the "National Association of Insurance And FINANCIAL ADVISORS" in the first place.