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DOL Fiduciary Rule

Standard/Duty of Care at the State Level

DOL Fiduciary Rule

Next week at the IAdCA’s (Insurance Advertising Compliance Association) annual conference in Scottsdale, Arizona, I am co-presenting with Rod Perkins of the ACLI on “Regulatory Shifts in Standards of Care.”  We had initially planned this as a session on the DOL fiduciary rule, but as all readers know what we know about the future of the DOL rule can be summarized pretty quickly: “We don’t know.”  See some of the 1,000 plus comments received by the DOL as collated by Financial Planning here.  Immediate enforcement seems off, a delay seems likely, confusion a sure thing.  But what we do know is that the standard of care owed in life insurance and annuity transactions is only going in one direction. Higher. That is coming in the context of suitability – not only on the front lines of determining what is an individual suitable sale, but also in the enforcement of annual reports to senior management. 

This week’s Bloomberg Businessweek has an article that could indicate that duties in the standard of care area could also come from another quarter: Democratic State Attorneys General.  Especially if the Trump administration does pull, water down, delay, or ignore enforcement of the DOL fiduciary rule.  In a piece called Blue State AGs: The Dems’ New Resistance, Erik Larson, Esme E. Deprez, and Kartikay Mehrotra, say “since the election, Democratic AGs have almost daily conference calls.” There is nothing in the article to suggest that the standard of care owed in insurance transactions is on this group’s radar – they are busy with the travel ban, other immigration issues and environmental protection regulations. But that does not mean that we won’t hear from them if the DOL’s rule gets rolled back like the EPA’s regulations. The article puts forward a reason why we very well could see such action: It explains this way: “Serving as a state attorney general is ‘probably the most direct path to higher office.’ Says Chris Wilson, founder of WPA Research, a political strategy firm. He should know: His firm did polling and data analysis for [Greg] Abbott’s gubernatorial campaign. In Texas, Abbott was able to run on his record of suing a locally unpopular president [former President Obama] more than 30 times. ‘You can build an entire campaign for higher office around that.’ Says Wilson. ‘The flip side is that you’re going to see a lot of Democrats angle for the same thing.’” How easy does it sound to campaign on the sound bites around the fiduciary rule? The details of the complicated exemptions and the challenge of effective and meaningful disclosure get lost so easily.

As is so often the case, those who would cheer the loudest at a roll-back of the DOL fiduciary rule may be sorry what they wished for. The reality is there are market place abuses and there should be a clear standard of care in insurance transactions, if not relationships. I would like to see that come from the state regulators who really understand the market and the abuses happening there. Suitability is a big step toward that standard of care, but the number of problems still out there make clear that it isn’t enough as currently written and enforced in most states. Companies with strong programs don’t get rewarded with more sales because those with weak programs don’t get penalized by fines.

Perhaps if the DOL rule becomes a footnote in history that never really came to pass and the state AGs become more active in this area again – like some were when the first suitability rule was drafted – that calculation will change. Perhaps state regulators will pick up the mantle and write new regulations or revise and enforce existing ones. Perhaps the DOL rule survives the Trump administration confusion on what to do and becomes effective. One way or another, it seems likely a higher standard of care is coming. Shouldn’t we, as an industry, get out in front and work with state regulators on what that should be rather than waiting to see what might happen in Washington DC or in court?

Compliance under Trump, Part II

Compliance under Trump

A few weeks after the election I wrote a post about a Wall Street Journal piece that asked whether compliance was dead under President Trump. At that time the question was forward looking as the new administration had not yet come into power. Now, with just a few weeks of experience with this administration, the answer to that question is starting to take shape.

On January 30, President Trump issued an Executive Order on Reducing Regulation and Controlling Regulatory Costs. In the Purpose of this section the order states: “[i]t is important that for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.”  That one-for-two concept is reiterated in Section 2. Regulatory Cap for Fiscal Year 2017, Subsection (a) states “Unless prohibited by law, whenever an executive department or agency (agency) publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.” 

As someone who has made her career in regulatory compliance, this makes my head spin! There are outdated regulations that no longer serve an important or current regulatory purpose. There are regulations that were poorly conceived and therefore do not advance the regulatory purpose they were designed to address. There are overly complicated regulations that result in unnecessary compliance challenges. These, and other similar, regulatory issues should be addressed. However, a one-in to two-out concept for reducing regulations, which does not even look at the regulatory purpose (the benefit) of the regulations being added or removed reflects the notion that a smaller number of regulations is better regardless of the need or purpose for the rules. In my decades-long history in regulatory compliance, that is simply not the case. In fact, in my experience, there is nothing simple about effective regulation or regulatory reform.

One reason it is not a simple matter to reform a regulatory framework in any industry, but especially in financial services, is that typically a cost-benefit analysis is the approach used. Bloomberg Businessweek’s February 13-19 issue discusses some measurement challenges in Brendan Greeley’s article Trump’s New Math on Regulations. Both sides are hard, but there appears to be little doubt that measuring the benefit of a regulation is more difficult than measuring its cost. In Trump’s Executive Order, though, we don’t have to worry about measuring benefits. He makes clear that only one side of the equation matters: cost. He states in Section 2.(c) “any new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs associated with at least two prior regulations.” Section 2.(d) of the Executive Order goes on to state: “The Director [of the Office of Management and Budget] shall provide the heads of agencies with guidance [that shall] address, among other things, processes for standardizing the measurement and estimation of regulatory costs; standards for determining the costs of existing regulations that are considered for elimination; processes for accounting for costs in different fiscal years; methods to oversee the issuance of rules with costs offset by savings at different times or different agencies; and emergencies and other circumstances that might justify individual waivers of the requirements of this section. The Director shall consider phasing in and updating these requirements.” 

In my experience, regulatory agencies are not populated with people who like regulations for regulations’ sake. Instead people who work in regulatory agencies are committed to serve the purpose for which the agency exists and they see regulations, compliance with regulations and enforcement of compliance as an effective way to change individual and corporate behavior to accomplish the goals of the agency. That is not to say that we all agree on what the goals should be of any agency – certainly that is not the case. But to remove benefits from the equation makes the analysis simplistic in a way that, in my opinion, denigrates the importance of regulatory compliance in serving the public good. Even if one believes in limited regulation, presumably that limited regulation has to be effective, not just cheap.

I am not opposed to any discussion about whether a particular regulation or a group of regulations is actually beneficial or even to arguments about how much any benefit may be worth to us as a society. But I am totally opposed to the concept that any regulation is a bad regulation and that any regulation has merely a cost element and no offsetting benefit.

The suggestion that the only thing that matters is the cost of a regulation is just a way of saying that all regulations are bad. Some may be “more bad” than others – but it is not those that are less effective or those that do not have a clearly identified purpose – no, those that are “more bad” are those that are more costly, however that is calculated and regardless of their benefit.

This simplistic approach to regulatory reform may have another consequence, one that a Thomson Reuters article dated February 14, 2017 calls “Slow-rolling” by agencies. Richard Satran, writing for Thomson Reuters’ Regulatory Intelligence notes that “Reversing regulations that strike at the heart of an agency’s prior work may be even more difficult than passing new ones…The president cannot simply issue an executive order rescinding regulations he does not like. [said Rachel Augustine Potter, assistant professor of politics at University of Virginia] The process requires research, stakeholder meetings, publishing of proposals, comment periods and final publication. Delays can occur at any of these stages.” 

Andrew Kent, a law professor and constitutional expert at Fordham University is also quoted in the Regulatory Intelligence piece. His analysis is another justification for considering the benefits of existing regulation: “In a bureaucracy there are a lot of different ways people can slow down presidential initiatives they don’t agree with… And given the things this administration has been saying about agencies’ work, it is pretty likely that will happen.” 

DOL Fiduciary Rule

DOL Fiduciary Rule

If you are like me, you are very interested in what our new president will decide to do with the DOL Fiduciary Rule with its first implementation date of April 10, 2017 looming. Given the implications, there are a good number of folks holding their breath in hopes that it will be repealed. For these folks, Trump’s repeal of the DOL Fiduciary Rule will likely turn into a big sigh of relief, but what about everyone else? The work to prepare for and implement the rule’s requirements has been nothing short of daunting. Many agents, agencies, IMOs and carriers started the long and arduous process to be ready many months ago, and this puts them in a good position should the rule survive, but what if it doesn’t? What, if any, benefits result from the progress they have made? 

Registered Investment Advisors and Investment Advisor Representatives (“advisors”) have always been subject to fiduciary standards. Some would be happy to go back to arguing they are “better” and should have a competitive advantage with consumers over insurance-only agents who are not now, and if the rule is repealed, would not become subject to those standards. ( Advisors argue that the fiduciary standard is much different from the suitability standards that apply to the sale of insurance products no matter who sells them. 

The DOL rule hasn’t become dinner conversation beyond our industry. Nonetheless, if it is repealed, the issues and perceptions that led to its adoption and to including insurance products will not go away. There is a clear perception that those who sell insurance products and are not now subject to fiduciary standards act in their own interest rather than the interests of their clients. So it seems quite possible that the DOL rule, repealed or not, will become the catalyst for change within our industry. 

So, what happens next? We are not convinced that our industry can stop preparing for the DOL. We think it is likely that even if it does not become effective as it currently exists, changes will come that will change the standard of care owed to consumers, perhaps at the federal level and perhaps at the state level. 

We recommend continuing to prepare for compliance and our clients are choosing that path – at least for now. Regardless of what will flow from the president’s executive actions, we continue to help our clients navigate reviewing their advertising materials, agent agreements, and incentive offerings. In addition, on-site, online, or remote training is recommended for your home office and field personnel. We have found in-person training to be the most effective as it can be developed with your specific organizational needs in mind. Policies and procedures reflecting impartial conduct standards of care are in place for many companies, but not across the board. We would be happy to help you look at what you have done, what might still need to be done, and what a repeal might look like for your organization. 

This is a time of great change and it can be overwhelming, but one thing we can do is focus on strong relationships with consumers and making sure that no matter what happens with the specifics of this DOL rule, our products are sold in a way that is respectful and takes into consideration the best interests of consumers.

Wall Street Journal Risk and Compliance Journal asks: Does Trump Spell End of ‘Era of Compliance’?

In an article dated November 21, 2016, the WSJ’s Risk and Compliance Journal’s Ben DiPietro posed these questions to several risk and compliance experts:

  • Does Donald Trump’s victory – and Republican promises to rescind and reduce the number and scope of regulations – spell the end to the “age of compliance?”
  • Is it safe to assume there will be fewer compliance people needed, and less money spent on compliance, as there will likely be fewer rules for them to track?
  • What role can compliance play in an era of reduced regulation?
  • How can compliance remain relevant to the C-suite and board?
  • Will companies continue to invest in artificial intelligence and other regulatory technology or will they curtail spending because of what could be a lack of emphasis on compliance and enforcement? 

Although I suspect we will see major changes in specific areas, for example the possible rollback of the DOL fiduciary standard regulation, my opinion is that we will see little change in the overall scope of regulatory compliance.

Roy Snell, Chief Executive of the Society of Corporate Compliance and Ethics, leads off with what is the general tone of all of the interviewees, which is not so different from my own take on this question: “Enforcement is a for-profit industry and anyone who thinks there is going to be a material change, I would say good luck with that.” A very immediate example of this is the $7 million fine that the California Insurance Department just levied on Zenefits, Inc. for using unlicensed insurance producers. California indicated it is "one of the largest penalties for licensing violations ever assessed in the department's history.”

Donna Boehme of Compliance Strategists LLC states: “Not in the least. This notion reflects flawed thinking by “experts” without compliance subject matter expertise. They view the work of compliance as nothing but check-the-box activity driven by regulations. The reduction of regulations will have a direct effect on the activities of certain relevant risk areas like financial services and the environment, but changes in those areas will probably create even more work for compliance, which will have to work closely with its subject matter experts in those areas to respond to the changes.” On the question of compliance staff reductions, she adds: “Compliance will be just as important as ever, and those companies that unilaterally reduce their compliance resources and budgets will live to regret it. That’s because compliance has a much broader mandate than just managing the company’s response to specific regulations. Compliance is the necessary management tool and partner that helps the organization—through its employees, managers and partners—to govern itself and to find, fix, and prevent misconduct or other big problems before they explode unexpectedly in media headlines, with terrible results.”

Alison Taylor, director of advisory services at BSR, a consulting firm that focuses on sustainability, offered another interesting opinion: “Perhaps what we will see rather is the end of the “age of compliance” and the birth of the “age of ethics,” by which I mean compliance will no longer be undertaken as a process for its own sake, to meet regulatory obligations. It will need to consider—and respond to—political and reputational risk, and stakeholder opinion, far more directly.” She also brings her company’s more unique perspective into focus when she further states: “There has been a recent trend to separate out ethics and values from compliance, and embrace sustainability and social responsibility as a strategic issue. And there is debate in the compliance profession whether it is appropriate for compliance officers to consider wider questions of ethics beyond legal compliance and corporate social responsibility more broadly. There is a strong argument to putting compliance with the law, and keeping deck chairs in a row, to one team, while wider risk and reputation questions are considered at a more strategic level under a variety of organizational approaches, but necessitating senior oversight. Whatever happens to the funding and resources available to compliance officers, the need to consider corporate reputation, values, and purpose will continue and accelerate. All this speaks to the need to stop obsessing over compliance for its own sake, and start to consider how to survive and thrive over the long term.”

There are additional thoughtful and insightful comments from others in compliance in the article and I recommend it for all who are interested in this field going forward.

Let us know your thoughts!

Regulations keep getting longer!

I have often heard the joke told at AICP and other compliance conferences that compliance professionals essentially get paid by the word, so we have a propensity to go “on and on and on” when just “on” would do. The same could be said for regulators, especially as of late.

Virtually no discussion of the DOL Fiduciary Rule fails to mention that the materials are over 1000 pages. And now we have an NAIC just-adopted 2016 Uniform Unclaimed Property Act. Alan Prochoroff writes in the August 15, 2016edition of Insurance Compliance Insight, referencing and linking to a Sutherland Legal Alert, making the same point, that “One aspect is obvious: The 2016 version is huge! It has almost 100 sections compared to just 30 from 1995.” Both Sutherland and Prochoroff note that quantity is not necessarily quality. I would argue that from a compliance standpoint, quite the opposite is true. 

Most of us have heard the famous quote, often attributed to Benjamin Franklin, though also to many others, that, “If I had more time, I would have written a shorter letter.” (The Quote Investigator appears to think that Blaise Pascal, the French philosopher and mathematician should get the credit.) That holds true for regulations as well. Often long regulations reflect an attempt to satisfy all drafting participants, but they leave those of us that are trying to comply wondering how to jump through all the hoops those efforts produce. Often they don’t result in better regulation or more compliance, simply more law department and compliance department dollars being spent to parse and implement.

The NAIC has rarely been accused of acting to quickly, but the drafts that emerge sometimes suggest that a commitment to brevity might actually result in a better regulation and more consistent compliance. Only time will tell with the 2016 Uniform Unclaimed Property Act.