Federal regulators are taking yet another crack at extending a fiduciary rule to annuity sales, this time with tighter messaging and full-throated White House backing.
Administration officials began sharing details Monday on the long-awaited “Retirement Security Rule: Definition of an Investment Advice Fiduciary.” In doing so, officials are attaching President Joe Biden’s name to the effort and using phrasing like “junk fees” and emphasizing the need to “close loopholes” in the law.
In the past, the Securities and Exchange Commission and the Department of Labor were mostly left alone in trying to publish fiduciary rules with arcane financial language. Those efforts ultimately failed to withstand court scrutiny.
“Financial Advisors should put savers’ best interests first, and not sell them lower returning products in order to maximize their own fees,” said Lael Brainard, director of the National Economic Council. “When a retirement saver pays for trusted advice that is actually not in their best interest and comes at a hidden cost to their lifetime savings, that’s a junk fee.”
The White House kicked off the rule effort with a blog post by the Council of Economic Advisors that takes direct aim at fixed indexed annuities. While acknowledging that FIAs, which come with zero downside “may still make sense for certain investors,” the CEA claimed that the capped upside is still costing investors a significant amount of lost savings for retirement.
The total assets held in FIAs have grown rapidly, from $185 billion in 2010 to $559 billion at the end of 2021, the CEA wrote, quoting from a 2022 Cerulli report on annuity sales.
“Even if this market doesn’t continue to grow, the amount paid by consumers in return caps could be as high as $7 billion annually and the amount lost to conflicted investment advice could be as high as $5 billion annually with respect to just this one category of investment,” the CEA authors wrote.
Unable to withstand court scrutiny
As far back as 2009 the SEC adopted Rule 151A, which removed FIAs from state insurance oversight and subjected them to federal securities regulation. The industry sued and won a year later when the U.S. Court of Appeals for the D.C. Circuit vacated Rule 151A.
The court cited the SEC’s “arbitrary and capricious” failure to perform the required analysis of the effect of the Rule on efficiency, competition, and capital formation.
In 2016, the Obama administration published a fiduciary rule that required a best interest contract exemption to sell FIAs. The industry responded with several lawsuits. In 2018, the Fifth Circuit Court of Appeals struck down the fiduciary rule.
Administration officials acknowledged the 2018 appeals court loss and said the new rule crafts the “five-part test” in a narrower fashion.
Under the DOL’s five-part test issued in 1975, for advice to constitute fiduciary “investment advice,” an individual who is not otherwise a fiduciary under an ERISA [Employee Retirement Income Security Act] plan must:
Render advice to the ERISA plan as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
on a regular basis;
pursuant to a mutual agreement, arrangement, or understanding with the ERISA plan or ERISA plan fiduciary;
for which the advice will serve as a primary basis for investment decisions with respect to the ERISA plan; and
for which the advice will be individualized based on the particular needs of the ERISA plan.
Official: new rule substantially different
The five-part test is being reinterpreted under the new rules, an administration official said Monday, in a significant departure from the 2016 Obama fiduciary rule. That effort “swept in anyone that was providing investment advice for a fee,” the official said, then provided carve-outs and exemptions.
The new rule is very targeted, the official said, applying only to those circumstances where the financial professional has a relationship of trust and confidence with a client. There are no contract requirements in the new rule, the official added.
There are amendments to both Prohibited Transaction Exemption 84-24 and PTE 2020-02, the official said. During a recent webinar, Faegre Drinker analysts explained why they expected the DOL to tinker with both exemptions.
Created in 1977 and amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts.
The Trump administration DOL created PTE 2020-02, which was allowed to take effect by the incoming Biden administration.
The replacement investment advice rule created a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and reinstated the five-part test to determine what constitutes investment advice.
Upon taking effect in February 2022, the rule was immediately sued in Texas by the Federation of Americans for Consumer Choice, and in Florida by the American Securities Association. Judge Virginia M. Hernandez Covington sided with the ASA in striking down a portion of guidance the DOL issued in 2021 that expanded the definition of a retirement plan fiduciary.
The DOL stopped defending the Trump-era rule earlier this year, focusing its efforts on yet another set of rules.
InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at firstname.lastname@example.org. Follow him on Twitter @INNJohnH.
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