With several references made to the movie Groundhog Day, witnesses testifying at a House subcommittee hearing to examine the DOL’s proposed investment advice fiduciary rule suggested the proposal goes beyond its legal authority and called on Congress to act before the guidance ends up in litigation. 
“I’ve been pushing back against this misguided effort since I first came to Congress in 2013, and I am in utter disbelief that we’re still having this fight. This latest proposal is yet another bite at the same rotten apple. It should be withdrawn immediately,” stated Rep. Ann Wagner (R-MO) setting the tone early in her opening statement.
“As we saw when the 2016 rule went into effect, this proposal will shut millions of low and middle-income Americans out of the financial advice market, and we would be left with two classes of investors: those who can afford investment advice, and those who cannot,” she further stated.
Wagner is chairwoman of the House Financial Services Subcommittee on Capital Markets, which held the Jan. 10 hearing to examine the DOL’s proposed fiduciary rule and its implications for retirement savings and access.
The hearing featured a single panel of witnesses (most of whom are opposed to the proposal), including Bradford Campbell, Partner with Faegre Drinker; Susan Neely, President and CEO of the American Council of Life Insurers (ACLI); Jason Berkowitz, Chief Legal & Regulatory Affairs Officer at the Insured Retirement Institute (IRI); Marc Cadin, CEO of Finseca; and Kamila Elliot, CEO of Collective Wealth Partners.
ARA Backs Proposal
While the American Retirement Association didn’t testify at this hearing,[1] the organization did submit a statement for the record, contending, among other things, that the rulemaking is needed to ensure that ERISA continues to operate as intended.
“Today, the retirement landscape is almost unrecognizable from its beginnings: 401(k) plans dominate the retirement plan market, the number of small business employers sponsoring plans has skyrocketed, individual investors make most of the investment decisions for their retirement plan assets, and the variety of investment vehicles included in these plans continues to grow,” the ARA stated.
The statement explains that, when ERISA was enacted and the existing regulation was promulgated in 1975, defined benefit pension plans of large companies represented the vast majority of employer-sponsored retirement plans, while 401(k) plans did not even exist. Individuals enrolled in these plans typically received payments of annuity distributions from their pension plans, and therefore were not making individual investment decisions. Rather, representatives from large companies made these investment decisions on behalf of all participants.
“Despite the evolving retirement landscape, ERISA’s statutory protections continue to apply uniformly without any regard to these significant shifts and leaves a significant number of retirement savers and small employers without any fiduciary protection,” the ARA further stated in offering support for the proposal.
Déjà Vu
As to the broad themes of the hearing, much of it focused on the DOL’s efforts from a decade ago compared to today, including the differences between the current proposal compared to the version thrown out in 2018 by the Fifth Circuit U.S. Court of Appeals, and whether the current proposal is overly prescriptive or correctly fills a gap in standards.
To that end, several witnesses and committee members contended that the DOL’s proposal is not necessary, arguing that existing federal and state regulations—including ERISA’s existing five-part test, the SEC’s Regulation Best Interest (Reg BI) and the National Association of Insurance Commissioners’ best interest standard for annuity sales—safeguard consumers and retirement investors seeking financial advice.
“The reason we are here today is that the Proposals go well beyond DOL’s limited authority. In fact, the Proposals would make DOL the primary financial regulator of $26 trillion, approximately half of which is held by individuals in individual retirement accounts and annuities (IRAs) rather than employer-provided plans,” testified Brad Campbell, who previously served as Assistant Secretary of Labor for the Employee Benefits Security Administration.
Among other things, Campbell argued that the proposals would create conflicting regulatory regimes reducing consumer access to financial professionals. “If the Proposals were finalized, and those individual accounts were subjected to the Department’s authority in a manner similar to employer-provided plans, those insurance, securities and bank professionals serving them would now have to comply with a new, highly detailed, and very proscriptive Federal regulatory regime led by the Labor Department that would simultaneously apply with—and in many cases, materially conflict with—the
requirements of their ‘normal’ state insurance regulation, state and Federal securities regulation, or state and federal banking regulation,” he argued.
Notably, Rep. Brad Sherman (D-CA), who is the ranking Democrat on the subcommittee, said that he falls “in between those who love the proposal and those who hate it,” further contending that something is needed to fill the gaps in the existing regulatory guidance. To that end, Sherman expressed concern that 10 states still have not adopted the NAIC’s model guidance and inquired whether a federal solution is needed to provide “best interest” protection across the board.
Filling a Regulatory Gap
Kamila Elliott, who was the lone witness testifying in support of the DOL’s proposed rule, contended that the proposed rule will help fill a regulatory gap when providing retirement investment advice; that it’s consistent with the purpose and meaning of ERISA; and it will not result in reduced access to advice.
“The scope of both Regulation Best Interest and the NAIC Model Regulation are limited to recommendations to retail customers, and thus they do not apply to recommendations to employers who sponsor 401(k) plans,” stated Elliott. “Further, neither Regulation Best Interest nor the NAIC Model Regulation cover real estate, many insurance products, commodities, certificates of deposit, other bank products, and certain cryptocurrencies. The proposed rule is needed to fill these gaps.”
Moreover, Elliott pointed out that opponents of the proposed rule say that the best interest standard should not apply to someone who is getting paid on a one-time, commission basis, contending that is a red herring. “How a financial professional is paid should not determine whether they must act in their client’s best interests when providing retirement investment advice. It is the delivery of retirement investment advice, and not the method of compensation or term of the advice, which is relevant in determining the standard of conduct that should apply,” she argued.
APA Foot Faults
Meanwhile, beyond the discussion among subcommittee members and witnesses regarding whether the proposed guidance is appropriate and fills a necessary gap, several witnesses and members contended that the DOL has not been in compliance with the Administrative Procedures Act (APA) in pushing out the rule and suggested that the proposal is destined for litigation.
Among those were former DOL official Campbell, who stated that he has never seen a hearing held on a regulatory proposal before the comment period expired, contending that the DOL is “driving a pre-determined result.”
“This has been a flawed process that’s inviting legal challenges,” added Rep. Bryan Steil (R-WI), who also suggested that the DOL has not been following the APA procedures.
More from the Hearing
The hearing comes roughly one week after the comment period for the DOL’s proposal closed. 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. The DOL allowed 60 days for comments and denied several requests to extend the comment period.
Footnote
[1] American Retirement Association 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.
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