Commissions-based compensation is the backbone of the independent distribution of insurance products and is threatened by the proposed Department of Labor fiduciary rule.
And that is the DOL’s intent, said Marc Cadin, CEO of Finseca, who testified Wednesday at a House Capital Markets Subcommittee hearing on the rule.
“The department is on an ideological crusade over the last 13 years to effectively ban commissions,” Cadin said. “That’s why they continue to come back and back and back with regulations that are so punitive that it will literally make it impossible for our members to do their jobs.”
The hearing, titled “Examining the DOL Fiduciary Rule: Implications for Retirement Savings and Access,” was led by Rep. Ann Wagner, R-Mo., a longtime opponent of DOL attempts to extend fiduciary status.
Wagner kicked off the hearing with a withering commentary on the DOL’s fourth attempt at essentially a blanket fiduciary standard.
“I’ve been pushing back against this misguided effort ever since I came to Congress in 2013, and I am in utter disbelief that we are still having this fight,” Wagner said. “This latest proposal is yet another bite at the same rotten apple. It should be withdrawn immediately.”
Ensuing commentary from lawmakers fell along partisan lines, with some exceptions. Notably, 10-term Congressman David Scott, D-Ga., broke with his party in speaking against the rule. He referenced a 2015 letter sent to then-Labor Secretary Tom Perez, signed by 93 Democrats, which expressed concerns about a previous fiduciary rule.
“In that letter, we urged the Department of Labor not to move forward with any fiduciary role that will, one, limit consumer access to advice [and] two, disproportionately impact low- and middle-income communities,” Scott said.
A federal appeals court would go on to vacate the Obama administration’s fiduciary effort in 2018. But the new rule is virtually the same, panelists said.
“We believe that by forcing all financial professionals into fiduciary status, it will again cause millions to lose access to products and services they need,” Jason Berkowitz, chief legal and regulatory affairs officer, Insured Retirement Institute, told Scott.
Congress has the power
Rolled out on Halloween, the newest fiduciary rule continues to drumbeat from the DOL to hold all retirement advice to the toughest standard. At 494 pages, the rule makes changes to transaction exemptions that would essentially make all rollover recommendations fiduciary.
Since the rule was made public, the DOL moved quickly to get a public comment period and a public hearing wrapped up within 60 days, working around several major holidays. Compared to previous fiduciary proposals, it was significantly condensed. A comment period closed Jan. 2 with 19,459 comments received.
The DOL will resume work on the rule, ostensibly incorporating feedback it received. A final fiduciary rule could be published by late winter or early spring, analysts say. Industry lawsuits will surely follow, although Cadin challenged lawmakers to take action first.
“I hope that we don’t get to a lawsuit or litigation because I really think it’s the responsibility of Congress to stop the department from doing what is clearly going to harm millions of Americans,” he said near the end of the 2.5-hour hearing.
Bradford Campbell, partner, Faegre Drinker, headed the Employee Benefits Security Administration from 2006 to 2009 under President George W. Bush. EBSA is the agency determined to expand the fiduciary standard.
Congress allowed the Labor Department to have authority over workplace retirement plans because, in many cases, someone else is making crucial decisions for workers, Campbell explained. Through its fiduciary rule, the DOL is “seeking to export the rules that were designed for this special employer-provided situation into the $13 trillion retail marketplace for individual retirement savers that Congress never intended to have apply in that space,” he added.
‘The DOL two-step’
They’re attempting to do so through “a clever trick I like to call ‘the DOL two-step,'” Campbell said. The first step is to dramatically expand the definition of what is considered fiduciary advice for purposes of the prohibited transaction rules in the tax code.
“The effect of that is that ordinary, perfectly legal and appropriate transactions, in which, for example, there is a commission paid to an insurance producer or a broker-dealer, now become illegal prohibited compensation by virtue of calling that if fiduciary relationship,” Campbell noted.
In step two, the DOL creates an exemption that allows the producer to get paid for providing that advice, “but only if you comply with an extensive series of new conditions, one of which is the imposition of a standard of care that is almost identical to the standard fiduciary standard of care,” he added.
The big changes in the fiduciary rule proposal deal with two exemptions, which allow annuity sellers to collect a commission: Prohibited Transaction Exemption 84-24, which dates to 1977, and PTE 2020-02, an alternative created by the Trump administration.
Amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts. Under PTE 2020-02, if an “investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary.
There are strict requirements with this exemption. Along them, the producer must adhere to “Impartial Conduct Standards.” They include: give advice that is in the best interest of the participant, the insurance company and the agent receive no more than reasonable compensation, and make no materially misleading statements.
Independent agents used to relying on PTE 84-24 to get paid commissions are in for the biggest change. The only permissible compensation would be the upfront commission, the renewal fee, and any trailing fees, Campbell has said.
Of the five witnesses, only Kamila Elliot, CEO of Collective Wealth Partners in Atlanta, spoke in favor of the rule. She spoke on behalf of the CFP Board, which has a fiduciary standard that applies to all financial advice, including one-time sales recommendations.
Claims that middle- and low-income Americans would lose access to financial advice are incorrect, Elliott told lawmakers. Likewise, commissions are compatible with the fiduciary standard, she added.
“The rule does not prohibit financial professionals from earning commissions,” Elliott said. “Most CFP professionals earn commissions and my firm … provides financial planning with a focus on a middle- to high-income clients. And we are all fiduciaries. We provide advice that our clients need at a price they can afford and in their best interests.”
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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