An old saying goes, anytime a politician says, “It’s for the children,” hang on to your hat and your wallet. The same is coming true for consumers. The ramifications of the DOL fiduciary rule are sweeping, though unappreciated by those not deep into compliance implementation, as the April 10 deadline approaches. The task list to comply at CreativeOne is more than 100 pages long, but littered with best guesses as to what will really stand up to the DOL-desired lawsuits to sort out what complies. What’s really wrong with a regulation to protect consumers from bad financial advice for qualified money transactions? Isn’t Barbara Roper of Consumer Federation of America correct when she encourages not even a delay in the rule because it “protect(s) American families’ financial advice,” and “… a strong majority of Trump voters want the rule to move forward”? Isn’t Thomas Perez doing angels’ work when he asserts the rule assures, “… professionals providing retirement investment advice have to give advice that’s in the best interest of their clients and not divert their clients’ hard-earned income into their own pockets through hidden fees and conflicted advice”? How can we, in the industry, oppose the forces of right and light for consumers? Is a legitimate consumer satisfying argument being made? No, but I believe it exists.
Many industry opinions assert procedural missteps by the DOL, such as they surpassed their congressionally authorized (and long-outkicked) authority, the rule harms the industry, or even some consumers. Many of these contentions are brilliantly exposited in the three primary lawsuits by the Chamber, NAFA and MSG. (See Arguments against DOL Fiduciary Rule.)
Unfortunately, these types of arguments do not resonate with a public (or government politicians and functionaries, for that matter) that is increasingly skeptical of business ethics, has drifted toward views of government as nanny-protector in all areas of life, doesn’t understand the economic engine that choice and free enterprise have wrought in the U.S., and has forgotten most of their high school consumer econ class about being an informed consumer.
Here’s what I believe consumers think when they hear these, and on which regulators are relying.
Procedural missteps Honestly, procedure is for lawyers. If the DOL or any regulator has to cut a few corners to get consumer protection regulation done, who cares? After all, we just had eight years of a phone and a pen and it works. Even without the DOL, Congress would eventually do fiduciary legislation of some sort for all financial services, so “why not speed up the process?”
Regulations exceeding authority Who cares as long as my political party’s aims are achieved, my corner of the world gets more money, short-term benefits, or more supposed protection. Damn the long-term consequences.
Class-action lawyers suing businesses into oblivion with a required contract fashioned from whole cloth As long as lawyers and creative lawsuits don’t impact me or are on my side, sue away.
Harm to business I think they make too much money off me anyway, so if it gets me cheaper service, I’m all for it.
Harm to consumers Hey, prove it to me: the DOL says it will lower costs—reveal them to me and save me money. Let’s try this and see. I may end up electing to go get cheap robo-advice online anyway, just like a good Amazon purchase.
Regulation that sets up conflicts of law Specifically, that the DOL made no attempt to coordinate this rule with existing state insurance law. Not good, but the NAIC didn’t seem to put up much of an objection during original comment, so maybe the conflicts aren’t that important. The more laws and rules the better—let the lawyers figure it out.
As you can see, from a consumerist point of view, the more regulation, the merrier. But for a moment, however lacking in understanding of the full economic effect as some believe they are, let’s concede the DOL and their supporters’ positions.
- Concede there are additional protections needed beyond extensive current state insurance department suitability and advertising regulations, extensive FINRA, state securities regulators and SEC sales conduct requirements (in fact, advisors are already fiduciaries by definition, though DOL now deprives them of protections).
- Concede that the DOL aggressively played the regulation game by expanding its limited authority and getting judicial deference so the end justifies the means.
- Concede the DOL can make up whatever definitions they want for “fiduciary” and can play fast and loose with cost-benefit analysis and notification under the APA.
- Concede their rules can pick winners and losers as they see fit among agents, reps, advisors, BDs, RIAs, insurance companies, different types of annuities and securities vs. insurance. Concede the DOL can leave most IMOs in limbo with no ability to serve insurance-only agents without an exemption.
Even conceding all of that, isn’t there a possibility that most of us—Roper and Perez included—would want good, not bad, regulation? Can’t we agree on that?
What is “good” regulation and does the DOL fiduciary rule meet that definition? Most good government proponents think it doesn’t thwart the will of the people as represented by their Congress, it doesn’t violate the Constitution (the Chamber’s lawsuit contention of first amendment protections of speech and NAFA’s “void for vagueness” argument), it doesn’t fix a problem we don’t have, it doesn’t have costs that outweigh benefits. Well, no matter, for our purposes we’ve conceded those points above as not resonating with consumers.
How about turning millions of ordinary business salespersons into trust officers who have never been before? The rule prescribes all recommendations by a compensated financial salesperson must be in the “best interests” of the client, really their sole interest, regardless of the salesperson’s business finances, structure, her families’ future or ability to stay in business. This applies to financial institutions as well; sales are to be made not as a businessperson, but as though one were a charity. This is a transformation of our financial services industry without a finger lifted by Congress and the people.
Are we setting the table for other federal regulatory agencies to turn salespeople into fiduciaries, such as auto sales, realtors or even retailers? How would it be if you went to your job or small business and had to act as a fiduciary for every customer you interacted with? You and your company could be sued out of existence (more so than now) for advice second-guessed by trial lawyers. What would be the effect on our lives, our economy, and our nation? Would not there have been a better way in collaboration with Congress to make sure those people who did not have access to good advice now got better information on what was in the products and who was being paid what? The consumerists won’t make this reasoned discussion. I’m not sure they even understand it. This is bad regulation and should be remedied.
One final point. I would hope most should agree on—but the late administration evaded—as it rushed through an envelope-pressing (or busting) process, achieved political ends satisfying special interest groups and said, “good regulation be damned,” we are almost out of time and we need to lock in the next administration. This is a vague regulation to the point of compliance impossibility in a retail marketplace. There are two types of regulation. One is very specific, it inhibits innovation and growth by being too prescriptive, but it is clear how to comply. Some regulation is general, it encourages innovation and free enterprise by being principles-based, yet you are never fully sure of complying, though there are often safe harbors for compliance to avoid capricious interpretations.
The DOL has chosen the most onerous of both worlds. It is specific in consumer website design requirements, specific disclosure requirements, designation of committee makeups, and in the subsequent very slow drip of FAQs on numerous topics as we are a calendar quarter from full implementation. But it is also unduly general, and ultimately vague, with respect to meeting critical rule requirements, such as “best interests,” “reasonable compensation,” and “material conflicts of interest.” No one knows what these mean for sure. DOL has provided no safe harbor, and instead of the typical remediation for non-compliance, a collaborative regulatory relationship and explicit statutory fines, they mandate creative (ironically, profit-driven) trial lawyers as the ultimate arbiters. This was primarily because DOL had no other authority for enforcement.
This is bad regulation regardless of other issues. Our industry, from securities to insurance, and the consumer, benefits from good regulation. IMOs, BDs and RIAs, like those at CreativeOne, desire good regulation, and there are many. We have and always will want consumers to get well-disclosed, fair and transparent information and recommendations from financial professionals. We have been advocates of good state and federal insurance laws and regulations, from state suitability laws to FINRA and SEC sales requirements. The DOL fiduciary rule is definitely not one of those. It should be “delayed and repealed” immediately. Replacement with “good” regulation can only be justified after addressing its critical flaws and using the appropriate regulatory agency. The president, Congress and regulators should pay heed for the benefit of the financial industry, the American economy and the American consumer.
Arguments against DOL Fiduciary Rule
- The Department gave no warning it would remove fixed indexed annuities from the scope of PTE 84-24. (MSG)
- Failure to adequately consider costs and benefits. (NAFA)
- Exceeding authority is arbitrary and capricious, including redefining terms and relationships without authority.
- The Department arbitrarily treats fixed indexed annuities differently from all other fixed annuities. (MSG)
- The Department has exceeded its statutory authority in seeking to manipulate the financial product market rather than regulate fiduciary conduct. (MSG)
- The plain language and structure of ERISA and the tax code confirm that “fiduciary” status exists in special circumstances that ordinarily do not include brokers and other sales agents. (Chamber)
- The Department’s overbroad interpretation of “fiduciary” flouts that term’s plain meaning and is unreasonable and entitled to no deference (including misused, limited exempted authority, created private right of action, violation of federal arbitration act, flawed cost assessment, lack of FIA change notice, first Amendment violation). (Chamber)
- Placement of FIAs in BICE rather than 84-24 is arbitrary, capricious and contrary to law. (NAFA)
- The Department exceeded its statutory authority and acted in an arbitrary and capricious manner (including redefining of investment advice and fiduciary, contrary to congressional intent for IRAs, creates private right of action, treats FIAs as securities. (NAFA)
- Harm to Business
- The Department failed to consider the detrimental, perhaps debilitating, effect of its actions on independent insurance agent distribution channels. (MSG)
- The Department’s determination that FIAs are covered by the BICE is irrational and unworkable, leading to devastating industry effects (including, carriers can’t comply with BIC with respect to independent agents, carriers can’t comply with the BICE without filing BICs with state insurance departments for approval, agents can’t comply with BICE without acquiring securities registration). (NAFA)
- Failure to adequately consider impacts on small business. (NAFA)
- Bad Regulation
- The BICE is fatally flawed based on void for vagueness grounds. (NAFA)
- The Department failed to provide a meaningful explanation for how the BICE can work with respect to FIAs. (NAFA)
- Carriers can’t comply with BIC with respect to independent agents.
- Carriers can’t comply with the BICE without filing BICs with state insurance departments for approval.
- Agents can’t comply with BICE without acquiring securities registration. (NAFA)
Related terms: Legislation