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Regulation and Compliance > Federal Regulation > DOL

DOL Pushes Insurance Officials on Fiduciary Duty vs. Best Interest

By Melanie Waddell

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Labor Department attorneys bombarded insurance industry officials during the recent public hearings on Labor’s new fiduciary proposal about the difference between a fiduciary standard and that of a best-interest standard.

The online hearings were held on Dec. 12 and 13. On Dec. 22, Labor released transcripts.

More than 40 groups registered to testify. The comment period on Labor’s proposal ends Tuesday.

In late December, the department once again denied a request to extend the Jan. 2 deadline for comments on its new fiduciary rule proposal — this time from lawmakers.

Megan Hansen, a senior attorney in Labor’s Office of the Solicitor, asked Pamela Heinrich, general counsel and director of director of government affairs at the National Association for Fixed Annuities, during the second day of hearings to clarify the difference between a fiduciary standard and a best interest standard.

“Is there a difference?” Hansen asked. “You’re saying there’s a difference between those? Can you just clarify that difference?”

Heinrich responded. “Certainly a fiduciary standard is to act in the best interest of your client, but you don’t have the duty — I think the loyalty duty. So it’s a best-interest standard to act in the best interest of the clients as is the fiduciary standard, but it does not rise to the level of the sort of liability exposure to be an ERISA fiduciary in the context of insurance product sales is not intended to be.”

Thomas Roberts, an attorney at Groom Law Group representing NAFA during the hearings, added that ”to buttress that point, the [National Association of Insurance Commissioners] NAIC model standard is not the fiduciary standard and it is a best-interest standard. ”

It’s a best-interest standard, Roberts continued, “ because it’s a standard that supports responsible selling activity. And there is nothing wrong with that. And we need to be clear that the mere fact that salespeople who are professionals and who sell for transaction-based compensation are not fiduciaries, nor can they easily be fiduciaries because of the fact that they have an interest in the transaction.”

Hansen responded: ”I’m sorry that I’m having a hard time understanding this. I just want to make sure I understand the point you’re making and the terminology is causing me just a bit of difficulty. So what you are saying is that they do have to act in the best interest of their client.  You are saying it is a best-interest standard —”

Roberts responded: “Yes.”

Hansen replied:  “— So they have to act in the way that is best for their client, but that, that is not a fiduciary standard.”

Robert’s response: “That’s correct.”

Said Hansen: “So they do have to do what is best for their client —”

Roberts said:  “That’s correct.”

Hansen then replied:  “— but they don’t have to act as a fiduciary.”

Roberts stated: “That’s correct.”

Hansen said she was “still trying to understand where the — what the action would be that would be both in the best interest — the thing that is best for their client, but is not a fiduciary act. I’m still trying to understand where that line is.”

Roberts then went on to explain that as an insurance producer, he tried to evaluate whether a potential client was “in a situation where their personal circumstances suggest that they would benefit or could benefit from the insurance protections embedded in these products,” including protections against market volatility, loss of principal and the risks of outliving their assets.

The best-interest standard “that’s embedded in the NAIC model is calibrated about aligning the needs of the client with the features of the product. It is not a fiduciary standard, but it is a best-interest sales standard,” Roberts explained.

Tim Hauser, deputy assistant secretary for program operations at Labor’s Employee Benefits Security Administration, then asked those testifiying on behalf of NAFA whether the advice given by an insurance produer was individualized.

“You get information from a customer about their individual circumstances, make an assessment of their needs. Is that right?” Hauser asked. “Is that how these transactions work?”

Roberts of Groom Law responded: “Yes.”

Added Heinrich: ”Yes.  You gather — you gather a host of information from the consumer, yes.”

Hauser went on to further probe Hansen’s line of questions.

“It appears to me as I understand the way this relationship works, the advice — there’s advice, it’s individualized,” Hauser stated. “It’s about a fairly complex set of products that ordinary investors can’t really understand without this expert assistance. And the people they’re dealing with hold themselves out as acting in the customer’s best interest. And so from all of that, what is the thing that makes this not a relationship of trust and confidence, at least in those circumstances where the advisor is making a recommendation.”

Responded Roberts: “There is a difference, and we all know there’s a difference between a fiduciary relationship of trust and confidence and a professional sales interaction. A professional sales interaction is one where the transaction-based producer seeks to understand the individual circumstances and seeks to determine whether or not a product that, that individual has available for sale meets the customer’s needs. That is a best-interest interaction that is short of a fiduciary interaction.”

Melanie Waddell

@Think_MelanieW

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