Coming slightly more than a month after its first hearing on the Department of Labor’s proposed investment advice fiduciary rule, a second subcommittee of the House of Representatives debated the merits of the proposal, with the battle lines drawn between the two parties.
The Feb. 15 hearing by the House Education and the Workforce Subcommittee on Health, Employment, Labor, and Pensions—titled “Protecting American Savers and Retirees from DOL’s Regulatory Overreach”—featured the by-now, well-known arguments of opponents who contend that the DOL overstepped its regulatory authority, while supporters argued that the proposal is needed to fill a regulatory gap.
Like the Jan. 10 hearing by the House Financial Services Subcommittee on Capital Markets, the Feb. 15 hearing focused quite a bit on whether the Securities and Exchange Commission’s Regulation Best Interest (Reg BI) and the National Association of Insurance Commissioners’ (NAIC) best interest standard for annuity sales adequately safeguard consumers and retirement investors seeking financial advice.
“The rule is clearly outside the purview of the agency, yet they are trying to regulate it anyway. DOL’s expansive rule is a blatant power grab, seeking to force more types of financial professionals under its control,” stated Subcommittee Committee Chairman Rep. Bob Good (R-Va.) in kicking off the hearing.
In addition to arguing that other regulatory bodies at the federal and state levels already exercise oversight over the retirement products and services DOL is trying to bring within its jurisdiction, Good noted that his main concern is that he believes the proposal will have a “disastrous impact” on the industry.
“Past versions of the DOL fiduciary rule created massive headaches for the retirement products and services industry. The last time the government tried to issue a similar rule, financial institutions were forced to eliminate or limit brokerage advice services as a result,” Good stated.
Those points were also similarly raised by Doug Ommen, Insurance Commissioner of the Iowa Insurance Division; Thomas Roberts, Principal at the Groom Law Group; and Jason Berkowitz, Chief Legal and Regulatory Affairs Officer at the Insured Retirement Institute, who all testified in opposition to the proposal.
Joseph Peiffer, who is President of the Public Investors Advocate Bar Association, was the lone witness testifying in support of the proposal, arguing, among other things, that the rule is needed to address conflicted advice within the industry.[1]
“The numbers surrounding this problem are so big that it is hard to get your mind around,” Peiffer told the committee in noting that the Obama Era Council of Economic Advisers found that conflicted advice costs retirement savers at least $17 billion per year.
“These costs are particularly acute when retirees roll over their employer 401(k) plan to an individual retirement account (‘IRA’) because advice related to one-time rollovers is exempt from ERISA’s fiduciary obligations,” Peiffer testified. He further noted that the problem is compounded by the fact that advice to 401(k) sponsors and advice regarding the sale of fixed-indexed annuities and certain other non-securities is also not covered by ERISA’s protections.
While the American Retirement Association (ARA), which supports the proposal, didn’t testify at this hearing, the organization submitted a statement for the record to the earlier hearing, contending, among other things, that the rulemaking is needed to ensure that ERISA continues to operate as intended. In addition, ARA CEO Brian Graff did testify in early December before the Department of Labor for its hearing on the proposal, highlighting “the significant regulatory gap” regarding plan-level advice.
Overlapping Rules
Ommen, who serves as the Iowa Insurance Commissioner, stated that he has concern over the proposal’s potential impact on life insurance and annuity products, further contending that the DOL failed to reach out to state insurance regulators to discuss the impact on annuity sales.
“I would be remiss if I did not acknowledge that my fellow commissioners and I are not only concerned with the substance of the DOL’s proposed rule and its potential impact on retirement savers, but also the DOL’s lack of substantive coordination with its fellow regulators at the state level in developing the proposal,” Ommen testified.
The insurance commissioner added that he believed the DOL would seek to coordinate with its fellow regulators to understand existing authorities of the states because of the overlapping impact, but contended that did not happen.
Later in the hearing it was pointed out that only 42 states have adopted the NAIC model, suggesting that regulatory gaps do remain, but Ommen said he was confident that all the states would adopt the model by 2025.
Groom’s Roberts, who noted that he was testifying on his own behalf and not on behalf of any clients, contended that the proposal’s fundamental flaw is that it would “sweepingly confer” fiduciary status on virtually all financial professionals and salespeople, including broker-dealers and insurance agents.
“Many of those investment professionals are compensated for their work by receiving transaction-based compensation (i.e., commissions) for completed sales,” Roberts explained. “If ERISA fiduciary status were to be assigned to those same financial professionals, the commissions that they earn on completed sales would automatically be re-classified as illegal kickbacks, absent compliance with a series of complex, highly burdensome, prohibited transaction exemptive relief conditions prescribed by the DOL,” he testified.
The IRI’s Berkowitz, who also testified at the Jan. 10 hearing, similarly argued that the proposal is trying to circumvent the 5th Circuit U.S. Court of Appeals ruling, further suggesting that it would upend the existing regulatory framework and would “shoehorn financial professionals into pre-existing fiduciary standards that are incompatible with their business models.” Berkowitz also suggested that if “bad actors are exploiting regulatory gaps,” they should be addressed through targeted rulemaking, but added that he believes the current proposal is not fixable and should be withdrawn.
More from the Hearing
To view a replay of the hearing and copies of the witness testimony, click here.
The rulemaking package, named the “Retirement Security Proposed Rule and Proposed Amendments to Class Prohibited Transaction Exemptions for Investment Advice Fiduciaries,” was published in the Federal Register on Nov. 3, 2023, with a 60-day comment period.
The DOL is currently reviewing the thousands of comment letters that were submitted. Notably, the DOL’s unified agenda does not show a target release date for a final proposal.
Footnote
[1] Note: Because the Republicans control the House of Representatives, the committee chairmen exercise control over the committees, including what hearings to hold and who testifies; typically, the party not in control gets to invite one witness per panel.
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