After three months in office, the Biden Administration is beginning to build policy and regulatory momentum in a number of areas, including retirement security.
During the Trump years, there were some significant federal legislative achievements in the retirement security area, including most notably, the SECURE Act. However, the pace of federal regulatory activity slowed, and all eyes seemed to be on the Securities and Exchange Commission as its Regulation Best Interest slowly worked its way through the rulemaking process.
1. Federal ‘Fiduciary’ Standard
The Biden Administration initially surprised almost everyone by letting the Trump Administration’s prohibited transaction exemption go into effect on Feb. 16 as scheduled. This allows investment-advice fiduciaries to receive compensation for more types of guidance, including advice to roll over assets from a retirement plan to an individual retirement account (“PTE 2020-02”). Commentators and observers wondered whether the Biden Administration would focus its efforts elsewhere and avoid the battles over the ‘fiduciary’ duties and status of financial professionals that consumed the last few years of the Obama-era Department of Labor (“DOL”). At this point, it’s still unclear. However, the Biden DOL did send a ‘shot across the bow’ of fiduciary standard opponents when it indicated in recent guidance regarding PTE 2020-02 that “[t]he Department anticipates taking further regulatory and sub-regulatory actions, as appropriate, including amending the investment advice fiduciary regulation.”
2. State ‘Best Interest’ Standard
In the meantime, the National Association of Insurance Commissioners’ updated Annuity Suitability Model Law (#275) continues to be adopted by states, enshrining the ‘best interest’ approach as an alternative to the fiduciary standard. The updated Annuity Suitability Model Law, consistent with SEC Reg BI, requires agents, brokers and others selling annuities to act in the best interest of the consumer, and to disclose potential conflicts of interest. The rule, as revised, outlines care, disclosure, conflict of interest and documentation requirements.
Under the rule, an insurance salesperson would have to “identify and avoid or reasonably manage and disclose material conflicts of interest” and would have to maintain a written record explaining the basis for the recommendation. A customer would have to sign a disclosure document that outlines the products insurance agents can sell and how they’re paid. But the proposal would let producers continue to use commission-based compensation arrangements.
The updated Annuity Suitability Model Law includes a safe harbor for all insurance producers who are subject to, and actually comply with, equivalent or greater standards, such as Reg BI, which should help avoid duplicative compliance requirements for registered investment advisors and broker-dealers. To date, ten states (AR, AZ, DE, IA, ID, MI, ND, NE, RI and OH) have adopted the NAIC’s ‘best interest’ model.
3. PRO Act
While the ‘fiduciary’ debate continues to play out, the retirement industry has been faced with other challenges on the federal level. The Protecting the Right to Organize (“PRO”) Act sailed through the House of Representatives early on in the 117th Congress. The bill contains a wide range of provisions generally intended to protect the ability of employees to participate in collective bargaining. It would also dramatically expand the definition of an ‘employee’ in a fashion that would make insurance agents employees of the insurance carriers by whom they are appointed. This would create a myriad of complications for both agents and insurers with respect to compensation and taxation, in particular.
The PRO Act is unlikely to pass the Senate in its current form, but parts of it could be included in other bill(s). As such, the industry is working aggressively to educate Senators as to why insurance agents should be carved out of the scope of the bill.
TC120603(0421)1
