The DOL Proposal is based Upon on Flawed Assumptions

The DOL relies on its Regulatory Impact Analysis to justify its proposed rule. But as the
Investment Company Institute (ICI) explained at the Hearing on “Restricting Access to Financial
Advice: Evaluating the Costs and Consequences for Working Families and Retirees” before the
House Subcommittee on Health, Employment, Labor, and Pensions, of the Committee on
Education and the Workforce on June 17, 2015, the Regulatory Impact Analysis did not support
DOL’s assertion that there is a “substantial failure of the market for retirement advice.” The
Regulatory Impact Analysis did not consider how the proposal actually could limit retirement
savers’ access to guidance, products, and services, or how such limits could affect savers—
particularly lower- and middle-income savers with smaller account balances.

As the ICI made clear the DOL argument in its Regulatory Impact Analysis that broker-sold
funds “underperform” provided no benchmark for returns against which it measures this claim of
“underperformance.” The factual data provided by the ICI seriously challenged, if not disproved,
the academic research that DOL cited as the foundation of its conclusions.

The proposed rule’s cost-benefit analysis is equally flawed. The DOL grossly under estimates
the time and expense that would be required to comply with the new requirements on a
transitional - and ongoing - basis. The man-hours needed to make the substantial system changes
necessary to provide individualized disclosures and restructure compensation systems alone are
tremendous. The DOL should consult with all affected segments of industry to ascertain more
realistic projections of the projected burdens.

In assessing the economic benefits of the proposed rule, DOL also over-emphasizes the benefits
of so-called robo-advice. Insurers often service the needs of middle-market consumers and non-
affluent investors. These customers and policyholders value the ability to receive and discuss
advice and recommendations from trusted professionals, persons with whom they often have a
long-standing relationship and who understand their personal situation well. The imposition of
new fiduciary requirements as envisioned under the proposed rule is likely to have the effect of
reducing the supply of advice available to these consumers. Insurers provide well-tailored
products and are able to provide services to a broad cross-section of Americans. Inappropriate
expansion of ERISA and encroachment into state-regulatory authority in relation to insurance
products could have the unintended effect of significantly reducing the availability and variety of
high quality products for many consumers.

Proprietary Products

A bedrock principal for NAMIC is fair competition in which all market participants compete on
a level-playing field. As drafted, the proposed rule is not neutral in terms of choice of business
model, nor does it place products on an equal footing. Many insurers offer products through

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States, on the relationship between the national government and the States, or on the distribution
of power and responsibilities among the various levels of government.” DOL’s rule provides no
reasonable grounds for its broad preemption and fails to provide any proper consideration of
Section 514(b) or any attendant circumstances. It is imperative that DOL demonstrate that the
application of the proposed rule to the sale of insurance products by licensed insurance producers
does not “invalidate, impair or supersede” applicable state laws.

The sale of annuity products is directly regulated by the states. Almost all states have adopted
standards to ensure that the agent — or insurer if no agent is involved — have reasonable grounds
to believe that the product is suitable for the consumer. In complying with suitability standards,
insurers and insurance producers focus on their client’s specific financial situations and
investment needs, and inform the client of features of the product, including market risk, returns,
and fees. The existing standards for insurance products serve and protect Americans well. There
is no statutory authority — or economic necessity — to attempt to displace well functioning state-
based insurance regulatory authority over the sale of annuity or other insurance products.

Statutory Authority

The proposed rules are inconsistent with, and more expansive than, the underlying statutory
authority provided by ERISA. The DOL has similarly failed to present evidence that it possesses
the requisite authority to issue interpretative regulations. In enacting ERISA, Congress made a
conscious choice to exclude IRAs from Title I. Instead, Congress applied the prohibited
transactions rules of the Internal Revenue Code to IRAs. Congress has never extended Title 1’s
fiduciary duty rules to IRAs.

Despite clear congressional intent with respect to IRAs, the proposed rule’s expanded definition
of investment advice coupled with the requirements of the “Best Interest Contract Exemption” to
adhere to the substantive fiduciary responsibility would expand the application of ERISA beyond
Congressional intent. Such action would have the effect of amending, not just interpreting the
statute — authority well beyond the administrative powers of the DOL.

DOL argues that it is appropriate to expand the definition of investment advise in light of the
expanded use of 401(k) plans, IRAs and rollovers from ERISA employee plans. However,
Congress has amended ERISA regularly, including recent revisions as part of the Pension
Protection Act of 2006. The DOL cannot with any credibility argue that Congress was unaware
of the widespread use of 401(k) plans and IRAs or the rollover of assets from ERISA plans. If
the DOL believed changes were necessary the Administration should have sought a legislative
change to the statute. Simply because Congress does not act to expand or amend a statute does
not confer upon a department or agency the authority to unilaterally expand the breath and scope
of its authority through regulatory edict.


exclusive independent contractor arrangements. In addition, many offer proprietary products.
These structures often allow for low minimum investment amounts and provide investment
options for consumers will small account balances. The use of these products serves a unique
and necessary role within the retirement and savings planning system. Proprietary products are
just as appropriate for large segments of the market as non-proprietary products and any public
policy should not discriminate against a particular product or business structure.

The proposed rule also inappropriately targets specific fee structures. The DOL should not
through rule attempt to structure well functioning fee arrangements that have and continue to
serve consumers well. A variety of fee structures are appropriate in the retirement space to
account for costs, complexity, benefits and risk of various products. Just as one size does not fit
all in shoes it does fit in retirement planning needs and accordingly in associated fee structures.

NAMIC is concerned that the rule as outlined would inappropriately discriminate against many
insurer business models, insurance products and compensation structures. Such an outcome
would decrease both the number of available investment products, as well as market participants
— ultimately reducing competition and consumer choice.

There are More Appropriate Alternatives to DOL’s Proposal

It is by no means clear that federal jurisdiction is appropriate for the application of a fiduciary
standard for securities that are insurance products, but it is certain that the appropriate federal
regulator for securities is and should be the Securities and Exchange Commission (SEC). Under
section 913(g) of The Dodd—Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank), the SEC was ordered to study whether to impose a uniform fiduciary duty on both
investment advisers and broker-dealers and was given the authority to craft such a proposal.
Presently, broker-dealers are held to a standard that requires the products they sell investors to be
suitable, whereas investment advisers must put their clients’ interests ahead of their own.

There are regulatory efforts are underway by the SEC regarding the standard of care under the
securities laws for broker-dealers and investment advisers that provide personalized investment
advice about securities to retail customers. On January 21, 2011, the SEC issued a study on
broker-dealers and investment advisers and in 2013 released a request for information on
whether it should pursue a uniform rule for advisers and brokers. In April of this year, SEC
Chair Mary Jo White in testimony before the House Appropriations Financial Services
Subcommittee that the agency will forge ahead with a rule to create a uniform fiduciary standard
for broker-dealers. She told lawmakers the SEC will still seek to create a protective rule without
limiting the ability of small and mid-size investors to access “reliable, reasonably priced advice.”


NA MI — The difference is in the experience’

NATIONAL ASSOCIATION OF MUTUAL INSURANCE COMPANIES public policy| advocacy | education | networking | insurance | services

3601 Vincennes Road, Indianapolis, Indiana 46268

www.namic.org
Phone: 317.875.5250 | Fax: 317.879.8408

122 C Street N.W., Suite 540, Washington, D.C. 20001
Phone: 202.628.1558 | Fax: 202.628.1601

July 20, 2015

Office of Regulations and Interpretations
Employee Benefits Security Administration
Attn: Conflict of Interest Rule

Room N-5655

U.S. Department of Labor

200 Constitution Avenue N.W.
Washington, DC 20210

Re: Department of Labor, Employee Benefits Security Administration, Proposed Rule
Definition of the Term ‘‘Fiduciary’’; Conflict of Interest Rule—Retirement Investment
Advice 29 CFR Parts 2509 and 2510, RIN 1210-AB32

Dear Sir/Madam:

The National Association of Mutual Insurance Companies (“NAMIC”) appreciates the

opportunity to provide comments regarding the proposed rules and request for comment set forth
above (the “Notice”).

NAMIC is the largest property/casualty insurance trade association in the country, serving
regional and local mutual insurance companies on main streets across America as well as many
of the country’s largest national insurers. The 1,400 NAMIC member companies serve more than
135 million auto, home and business policyholders and write more than $196 billion in annual
premiums, accounting for 50 percent of the automobile/homeowners market and 31 percent of
the business insurance market. Through our advocacy programs, we promote public policy
solutions that benefit NAMIC companies and the consumers we serve.

Background

On April 14, 2015, the Department of Labor (DOL) released a proposal to re-define who is
rendered a "fiduciary" of an employee benefit plan under the Employee Retirement Income
Security Act (ERISA) by providing investment advice to a plan or its participants or
beneficiaries.


It is important that the SEC and DOL efforts lead to rules that are complimentary in nature. The
DOL’s present push to revive plans for a fiduciary duty on those who advise retirement savers
appears to ignore decades of effective SEC regulations and could cost low- and middle-income
households investment opportunities.

The SEC has continually evidenced an appreciation and respect for the appropriate role of the
states in the regulation of insurance products and services. We urge the DOL defer to the
expertise of the SEC in this area, or at the very least to afford the public sufficient opportunity to
consider the SEC’s regulatory efforts.

Conclusion

Accordingly, NAMIC believes that the DOL rule is an improper preemption of state insurance
regulation, is not supported by a factual basis and addresses regulatory questions that are outside
the expertise and purview of the DOL. We respectfully request that the DOL provide: (1)
reasonable grounds and proper consideration of its preemption of established and recognized
state insurance jurisdiction; (2) a revised Regulatory Impact Analysis based on more objective
and verifiable data and analysis; (3) a recognition of the appropriateness of proprietary products,
alternate fee structures and business models; and, (4) deference to the SEC to conclude its work
in this area.

If you have questions or comments, please feel free to contact me at 202-628-1558,
tkarol@namic.org.

Respectfully submitted,

Thomas Karol

General Counsel, Federal

National Association of Mutual Insurance Companies

122 C St NW, Suite 540

Washington, D.C. 20001 The difference is in the experienceTM


The proposal by the DOL is billed as a new level of protection for investors in their dealings with
brokers and other financial professionals who give advice on retirement accounts and defined-
benefit pension plans. However, the proposal adopts a broad definition of fiduciary “investment
advice” encompassing “sales” communications, certain educational materials, and other
situations. In addition, the proposal broadly expands the Department’s current regulatory
authority over employer-provided retirement plans to all Individual Retirement Accounts (IRAs)
as well as to all private sectors, employer-provided retirement plans. The DOL proposal would
not apply to property casualty insurance contracts, but would affect traditional insurance
products such as fixed index annuities in addition to variable annuities, which are regulated as a
security.

The Proposed DOL Fiduciary Standard Rule is an Inappropriate Federal Regulation of
Insurance

The primacy of the states in the regulation of insurance is well established. The McCarran-
Ferguson Act in 1945 clarified that states should continue to regulate the business of insurance
and affirmed that the continued regulation of the insurance industry by the states was in the
public’s best interest. The Financial Services Modernization Act of 1999, also known as the
Gramm-Leach-Bliley Act, once again affirmed that states should regulate the business of
insurance by declaring that the McCarran-Ferguson Act remained in effect. The Wall Street
Reform and Consumer Protection Act of 2010, better known as the Dodd-Frank Act, recognized
that the primary of state insurance regulatory functions remain as they have been since the
enactment of McCarran-Ferguson.

But while the proposed DOL rule refers directly to insurance two dozen times, DOL nevertheless
concludes that “[t]his proposed rule does not have federalism implications because it has no
substantial direct effect on the States, on the relationship between the national government and
the States, or on the distribution of power and responsibilities among the various levels of
government.” To support this assertion, DOL notes that Section 514 of ERISA provides, with
certain exceptions specifically enumerated, that the provisions of Titles I and IV of ERISA
supersede any and all laws of the States as they relate to any employee benefit plan covered
under ERISA. The breadth of this provision is clear in the definition of “state laws” which
includes “all laws, decisions, rules, regulations, or other state actions having the effect of law, of
any state.” The ERISA preemption is widely viewed as one of the most comprehensive and
inclusive preemptions in federal law; however, even ERISA includes a specific carve-out for the
regulation of insurance. The ERISA savings clause under Section 514(b)(2)(A) provides that
nothing in ERISA “shall be construed to exempt or relieve any person from any law of any state
which regulates insurance, banking or securities.”


It is true that ERISA “shall supersede any and all State laws insofar as they may now or hereafter
relate to any employee benefit plan” under ERISA § 514(a), 29 U.S.C. § 1144(a), but the “saving
clause” then provides that some state laws are not preempted: “nothing in this subchapter shall
be construed to exempt or relieve any person from any law of any State which regulates
insurance, banking, or securities.” ERISA § 514(b)(2)(A), 29 U.S.C. § 1144(b)(2)(A). In order
for a state law to survive preemption by ERISA, the state law must be one that regulates
insurance, as opposed to a state laws of general application that have some bearing on insurers.
Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329, 123 S.Ct. 1471 (2003),
citing ERISA, § 514(b)(2)(A), 29 U.S.C.A. § 1144(b)(2)(A).

In reserving the authority to regulate the business of insurance to the states, McCarran-Ferguson
provides that “[n]o Act of Congress shall be construed to ... supersede any law enacted by any
State for the purpose of regulating the business of insurance ... unless such Act specifically
relates to the business of insurance.” 15 U.S.C. § 1012(b). In Unum Life Ins. Co. of America v.
Ward 526 U.S. 358 (1999), the Court noted that in interpreting the “business of insurance”

the courts first ask whether, from a “common-sense view of the matter,” the contested
prescription regulates insurance. Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S.
724, 740 (1985); see Pilot Life, 481 U.S., at 48. Second, we consider three factors
employed to determine whether the regulation fits within the “business of insurance” as
that phrase is used in the McCarran-Ferguson Act, 59 Stat. 33, as amended, 15 U.S.C. §
1011 et seq.: “first, whether the practice has the effect of transferring or spreading a
policyholder’s risk; second, whether the practice is an integral part of the policy
relationship between the insurer and the insured; and third, whether the practice is limited
to entities within the insurance industry.” Metropolitan Life, 471 U. S., at 743 (emphasis,
citations, and internal quotation marks omitted); see also Pilot Life, 481 U.S., at 48—49.

Section 514(b)(2)(A) provides that "nothing in this title shall be construed to exempt or relieve
any person from any law of any State which regulates insurance, banking, or securities." ERISA
preemption analysis is no different than any other preemption analysis. John Hancock Mutual
Life Ins. Co. v. Harris Trust and Savings Bank, 510 U.S. 86, 99 (1993) ("we discern no solid
basis for believing that Congress, when it designed ERISA, intended fundamentally to alter
traditional preemption analysis").

The clear language of Section 514(b)(2)(A) makes it clear that the DOL application of Section
514 to preempt state insurance regulation warrants at least an explanation, rather than a blanket
dismissal. The application of the proposed rule would directly affect the policy relationship
between the insurer and the insured in the case of state regulated products, including retirement
annuities; and directly affect state regulated insurance companies and state licensed and
regulated producers. The DOL proposed rule provides no explanation of why DOL believes the
24 insurance references in the proposed rule do not have any “substantial direct effect on the

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