Insurance industry calls on DOL to allow propriety sales, revenue-sharing in fiduciary rule

Predicts business will 'contract dramatically' if agency doesn't give it an exemption to higher advice standard

Jul 1, 2014 @ 12:48 pm

By Mark Schoeff Jr.

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(Bloomberg News)

Insurance officials on Tuesday warned that if a pending Department of Labor fiduciary duty rule doesn't include flexibility on product sales, it will undermine the industry.

The Department of Labor is planning to re-propose a rule in January that would raise advice standards for those advising retirement plans by expanding the number of advisers who must follow a fiduciary standard to act in the best interests of their clients.

The fiduciary-duty requirement must come with an exemption for a company's signature funds, according to Marc Cahn, general counsel at Transamerica Retirement Solutions.

“Our industry would contract dramatically if people were deemed to be fiduciaries and couldn't use their proprietary product,” Mr. Cahn said during a panel presentation at the Insured Retirement Institute's Government and Legal Regulatory Conference in Washington. “It's the nature of our beast.”

Another participant in the session, Abigail Pancoast, vice president and chief counsel for retirement plan services at Lincoln Financial Group, said the DOL should not prohibit record-keeping firms from collecting revenue-sharing fees from funds in a retirement plan.

“We're worried there won't be an exemption,” Ms. Pancoast said.

In his meetings with DOL officials, Stephen M. Saxon, a partner at Groom Law Group, got the sense they did not think disclosure of conflicts would be sufficient. That makes so-called prohibited transaction exemptions even more important for the industry.

“The bottom line is, when we talked to the guys inside the government, we said, 'Look, if you're going to expand the universe of who is a fiduciary, then you have to make these exemptions workable,'” Mr. Saxon said during the panel.

The DOL first proposed its fiduciary-duty rule in 2010, asserting that a fiduciary relationship is critical in order to protect workers and retirees from conflicted advice as they build their retirement nest eggs on their own through 401(k) plans and individual retirement accounts.

The agency withdrew the rule after fierce resistance from the financial industry. Opponents said it would drive up liability and regulatory costs for brokers who sell IRAs and force them out of the advice business, leaving investors with modest retirement accounts nowhere to turn. Brokers currently operate under a suitability standard that allows them to sell higher-priced products as long as they fit a client's needs.

The latest delay in the DOL re-proposal occurred in May, when the agency announced it was moving its release from August to January 2015.

A revised rule might not make its way to final implementation, according to Mr. Saxon. He pointed out that even if it is re-proposed in January, a long comment period will follow as well as possible hearings and revisions. The timeline could stretch into the 2016 presidential election season, which would pose another obstacle.

“It's probably the most important and controversial regulatory initiative in 20 years,” Mr. Saxon said. “It's also the most contentious. The White House is going to continue to look hard at this as to whether they want to go forward with this regulation because of the election, because of the controversy, because it's irritating a lot of us who work in the financial services space.”

Advocates for the DOL rule contend that the delay until January gives the White House a chance to put its stamp on the fiduciary-duty issue and expand support for the DOL initiative.

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