Investment Advice Rule Could Still End Up Back In Court

InsuranceNewNet, John Hilton (March 12, 2021) —

The Department of Labor has settled on an investment advice rule that was written by the Trump administration and allowed to take effect by the Biden administration — so the rules should finally be clear, right?

Not quite.

There could be plenty more changes in store before the investment advice rule is finally in place, said Brad Campbell, a partner at Faegre Drinker Biddle & Reath, during a Thursday webinar sponsored by the National Association for Fixed Annuities.

In fact, more lawsuits might still be argued before the industry has a settled rule, Campbell said.

The potential legal issue concerns the best interest standard included in the investment advice rule, he explained. In 2018, the Fifth Circuit Court of Appeals tossed out the fiduciary rule, a predecessor to the current rule, ruling that the DOL exceeded its authority by creating a new regulatory scheme for the retirement plan space.

The 2-1 decision ended a long legal fight to stop the Obama administration’s fiduciary rule.


“I think there’s a good argument” that the best-interest standard in the new rule is “inconsistent with the Fifth Circuit decision,” Campbell said. “It could be the DOL was willing to take the risk because they think the opinion of the minority judge might prevail, if they were sued again, even though they lost in the Fifth Circuit. That’s an area where DOL I think went a little too far given what the Fifth Circuit said.”

The investment advice rule has two main parts: a new prohibited transaction exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the “five-part test” from 1975 to determine what constitutes investment advice.

The rule surprised some in the industry as a tougher regulation than anticipated from the Trump administration. For example, it expands the fiduciary duty for advisors handling retirement plan rollovers, a transaction historically treated as a one-time, nonfiduciary service.

Doesn’t Work For Insurance

The DOL rule took effect Feb. 16, but the department and the Internal Revenue Service are both deferring compliance with the new rules until Dec. 20 as long as the “impartial conduct standards” are met.

That means the recommendation is made to a best interest standard, it has no materially misleading statements and reasonable compensation.

Just complying with those standards is going to be difficult, Campbell said, and probably not worth it for insurance agents. For example, both the financial professional and the financial institution — bank, insurance company, RIA or broker-dealer — both have to agree in writing that they are a fiduciary for the transaction.

There are very specific disclosures about any conflicts that must be made on top of that, along with detailed evidence that the sale is in the best interest of the client, Campbell noted.

“You put all that together and it probably just doesn’t fit a lot of traditional insurance transactions where an independent agent is recommending a product from one of several different carriers, none of whom are going to be fiduciaries for that agent’s conduct and who aren’t really in a position to impose policies and procedures on that agent,” he said.

Insurance agents who are selling annuities can always utilize the existing prohibited transaction 84-24 exemption, Campbell said. PTE 84-24 permits agents and brokers, among others, to receive compensation, including variable compensation and commissions, in connection with transactions with plans and IRAs involving insurance contracts, fixed-rate annuities, and investment company securities.

“There’s a little bit of time to figure out which of these exemptions you’re going to use and put them in place if you don’t have them already,” Campbell said.