The [Upcoming] Fiduciary Rule:                                                          DOL’s not so insidious industry wrecking rule

Chicago, IL - By now, you have all likely heard about that on November 3, 2023, the Department of Labor (“DOL”) published in the Federal Register its proposed update to its “fiduciary rule” that defines when a person becomes a fiduciary to a retirement plan subject to ERISA or an IRA (each, together with their respective fiduciaries, participants, owners and beneficiaries, a “Retirement Investor”) as the result of providing “investment advice” for a fee or other compensation.  The White House stated that this rule was aimed at “junk fees in retirement products,” and targets, among other things, sales of investment products not regulated by the SEC (like a fixed index annuities), as well as advice to roll assets out of 401(k) plans.

This proposed rule (once finalized) would likely require registered investment advisers, financial institutions, and other retirement plan service providers to review their current offerings to retirement investors and update their compliance procedures, particularly as they relate to 401(k) plan rollovers or sales of annuity products.

Undoubtedly, all responsible financial professionals believe firmly in their fiduciary duties ensconced in ERISA laws and others as it pertains to retirements. Our nations investment advisors (RIAs, IBDs) and insurance representatives, all licensed, work every day to help Americans meet their retirement goals. Thus, no one can argue that fiduciary duties should not be upheld or enforced. But they already exist, more rules are not needed.

Perhaps that is why as of the writing of this paper, attempts to stop the Labor Department’s retirement security rule are in play in Congress and in the courts. Given the history of this rule fight, overturning the rule will be in the courts, not Congress. Despite this, advisors should be prepared to comply by this September 23^rd, when the rule’s initial requirements take effect.

Under the proposed rule, a person would be a fiduciary by virtue of investment advice if:

1. the person makes a recommendation regarding investments of a plan (including an IRA or an employee retirement plan, such as a 401(k) plan or another ERISA plan);
2.  the recommendation is made in the context of a professional relationship where the investor would have a reasonable expectation that the other party should be acting in their best interest, based on criteria set out in the regulation as described below; and
3. the person receives compensation for the advice, either directly or indirectly, such as through a commission

Ironically, a fiduciary duty already exists when advising clients. Our government simply believes that because a Retirement Investor might be taken advantage of it must re-regulate the industry. Well, you might speed in your car today on the way to work – do we need another law to remind you that speeding is a strict liability offense?

To accept commissions and revenue sharing, advisers who accept them will be required to have clients sign a best interest contract exemption. With such a contract in place, customers will be able to sue their advisers in court if they believe their interests have not come first. Whoa! Did we forget that financial services are governed by a self-regulating organization (SRO), notoriously known as the Financial Industry Regulatory Authority (“FINRA”)? FINRA already has best interest rules, but moreover, it is a mandatory arbitration forum, when certain elements are met, so do we have a conflict of laws?

But this is more than a rule, it is a 1,023-page rule that was six years in the making, we need to consider what this is all about.

Is this really about government’s overarching desire to protect retirement or something more nefarious?

Recall that since the McCarran-Ferguson Act of 1945, Congress has delegated regulating the "business of insurance" to the states. By congressional act, Congress could rescind its delegation and create a federal regulatory framework, similar to what we see in the banking industry. Some say it is unlikely for political and practical reasons, yet we see this takeover begin with the newly proposed Fiduciary Rule.

The States and insurance professionals must stop this encroachment into the regulation of insurance. The regulatory framework of the States is more than sufficient to protect the public without the DOL killing the insurance industry with its over-reach.

It is ironic that the DOL whose mission it is to foster, promote, and develop the welfare of the wage earners of the United States, to improve their working conditions, and to advance their opportunities for profitable employment, is seeking to burden and jeopardize the careers of nearly 400,000 professionals in life insurance.

Pardon, the expression, but let’s call a spade-a-spade.  When you introduce a new “law,” 1,023 pages long, masked in the auspices of a rule, a hidden agenda exists. It has long been the case that the Federal government, by way of the Security and Exchange Commissions’ delegation of self-regulating organization status of FINRA, has pursued an abusive approach to small independent broker dealers (“IBD”), constantly enacting rules to drive small players out of the industry in favor of larger firms. You see, it is easier to regulate fewer large firms, and FINRA spares no effort in its abuse of small firms. Now the DOL is joining the “pile-on.”

Never mind that hundreds of thousands of Americans are employed by small IBDs and insurance agencies and brokerages. In fact, only the largest IBDs are expected to have the resources to build comprehensive compliance programs around the rule’s requirements, which include requisites such as benchmarking information to measure the reasonableness of adviser compensation.

Small IBDs and many insurance professionals will need to craft new administrative steps and invest millions in technology and training to meet the rule’s requirements. Does this not sound abusive? Merely reading the 1,023-page rule would put many IBDs and insurance professionals out of business.  The only firms capable of investing in the understanding, implementation, and investment to follow the rule will be those that can afford to invest millions of dollars. Therein lies the truth, a long-term goal of the DOL and the SEC (through FINRA), which is to eradicate the small finance professionals in America and make them employees rather than small business owners.

It is not surprising that large firms such as Fidelity, HUB, Morningstar, and Vanguard came out in support of the new rule.  What is surprising is that the National Association of Plan Advisors (NAPA) and its umbrella organization the American Retirement Association (ARA) came out in support of the rule. Apparently, they fail to recognize how many of their small member firms will be adversely affected.  As a member firm of NAPA, and a CPFA holder, I am significantly disappointed.

Given the deplorable state of Social Security, do we really believe government knows how to protect Americans’ retirement investments?

It is quite telling that the DOL refused to extend the comment period on the rule November 14, 2023, as they are trying to supplant the legislative authority of Congress with their own rule-making authority. It again requires one to ask who this is trying to protect?

This rule will increase costs to Americans.

In its zeal to limit “junk fees,” the DOL will actually achieve the opposite. The added burden of administering this rule will be passed on to the American investor. Furthermore, the burdens will drive many small professionals out of the market, which will: (i) reduce competition, and (ii) allow a smaller group of concentrated large firms to control and dictate pricing. Anyone who thinks large firms will not find a way to recover their fees should reexamine the history of our financial regulations.

Luka Erceg is Managing Director of Dynamique Financial, LLC, a firm providing investment management, wholesale insurance solutions, turnaround and restructuring services for distressed companies. He is a disabled investment manager at Dynamique Capital Advisors, LLC, with experience as a turnaround, restructuring, distressed and special situations investment and asset management professional. His experience includes energy finance, the founding of Simbol Materials LLC, and substantial board advisory engagements.

He holds a Juris Doctorate (J.D.) from South Texas College of Law, Master of Laws (LL.M.) from the University of Houston Law Center, Master of Business Administration (M.B.A.) from Rice University, and Bachelor of Marketing (B. Com.) from the University of Guelph. He is a Certified Turnaround Professional (C.T.P.) through the Turnaround Management Association and a Certified Insolvency and Restructuring Advisor (C.I.R.A.) through the Association of Insolvency and Restructuring Advisors.

On January 11, 2018, Luka suffered a left shoulder disarticulation (amputation) due to a flesh-eating bacterial infection brought on by bad oysters, Scientific American published his blog article “I lost my arm to microbes, but they can save the world”, on his tragic experience but the nonetheless ongoing importance of nature and microbiology in addressing global waste problems.