Regulatory Hot Topics

+ DOL Overview

The Department of Labor (DOL) has proposed a new definition of investment advice and proposed changes to several Prohibited Transaction Exemptions (PTEs), including PTE 84-24. There is a 60 day comment period from the time of publication in the Federal Register and a public hearing will be held approximately 45 days after publication. Following is a brief summary of some key points within the DOL's proposal. Note that this summary is not comprehensive and is only meant to provide you with some key points within the proposal.

Under the proposed rule, a person renders "investment advice" with respect to moneys or other property of a plan or IRA if the person makes a recommendation of any securities transaction or other investment transaction or any investment strategy involving securities or other investment property and the person satisfies either (i), (II), or (III):

(i) The person either directly or indirectly (e.g., through or together with any affiliate) has discretionary authority or control, whether or not pursuant to an agreement, arrangement, or understanding, with respect to purchasing or selling securities or other investment property for the retirement investor;

(ii) The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or

(iii) The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.

This means that virtually all Independent Producers who provide advice or recommendations that involve money in a retirement plan or an IRA, including rollovers, are providing "investment advice" as defined by the DOL in this proposal and will need to rely upon a Prohibited Transaction Exemption like PTE 84-24 or PTE 2020-02.

PTE 84-24:

The DOL has also proposed significant modifications to PTE 84-24. "Independent Producers" who wish to rely upon PTE 84-24 will need to adhere to the Impartial Conduct Standards (act in the Best Interest of the client, receive no more than reasonable compensation, and make no materially misleading statements) and provide substantially more disclosure to the client and the insurance carrier. The disclosure must include:

(1) A written acknowledgment that the Independent Producer is a fiduciary under Title I and the Code, as applicable, with respect to any investment recommendation provided by the Independent Producer to the Retirement Investor;

(2) A written statement of the Best Interest standard of care owed by the Independent Producer to the Retirement Investor;

(3) A written description of the services to be provided and the Independent Producer’s material Conflicts of Interest that is accurate and not misleading in any material respects. The description will include the products the Independent Producer is licensed and authorized to sell. The description must inform the Retirement Investor in writing of any limits on the range of insurance products recommended. The Independent Producer must identify the specific Insurers and specific insurance products available for recommendation.

(4) A written statement of the amount of the Insurance Commission that will be paid to the Independent Producer in connection with the purchase by a Retirement Investor of the recommended annuity. The statement must disclose the amount of expected Insurance Sales Commission, expressed both in dollars and as a percentage of gross annual premium payments, if applicable, for the first year and for each of the succeeding years.

(5) A written statement that the Retirement Investor has the right to obtain specific information regarding costs, fees, and compensation, described in dollar amounts, percentages, formulas, or other means reasonably designed to present materially accurate disclosure of their scope, magnitude, nature with in sufficient detail to permit the Retirement Investor to make an informed judgment about the costs of the transaction and about the significance and severity of the Conflicts of Interest, and describe how the Retirement Investor can get the information, free of charge.

(6) Before the sale of a recommended annuity, the Independent Producer considers and documents its conclusions as to whether the recommended annuity is in the Best Interest of the Retirement Investor and provides that documentation to both the Retirement Investor and to the Insurer;

(7) Rollover disclosure. Before engaging in a rollover or making a recommendation to a Plan participant as to the post-rollover investment of assets currently held in a Plan, the Independent Producer must consider and document its conclusions as to whether a rollover is in the Retirement Investor’s Best Interest and provide that documentation to both the Retirement Investor and to Insurer. Relevant factors to consider must include to the extent applicable, but in any event are not limited to: (A) the alternatives to a rollover, including leaving the money in the Plan, if applicable; (B) the comparative fees and expenses; (C) whether an employer or other party pays for some or all administrative expenses; and (D) the different levels of fiduciary protection, services, and investments available.

Substantial burdens are placed on insurance carriers (insurers) to create a more robust supervisory process over Independent Producers including the following:

Policies and Procedures (1) The Insurer establishes, maintains, and enforces written policies and procedures for the review of each recommendation before an annuity is issued to a Retirement Investor pursuant to an Independent Producer’s recommendation that are prudently designed to ensure compliance with the Impartial Conduct Standards and other exemption conditions. The Insurer’s prudent review of the Independent Producer’s specific recommendations must be made without regard to the Insurer’s own interests. An Insurer is not required to supervise an Independent Producer’s recommendations to Retirement Investors of products other than annuities offered by the Insurer.

(2) The Insurer’s policies and procedures mitigate Conflicts of Interest to the extent that a reasonable person reviewing the policies and procedures and incentive practices as a whole would conclude that they do not create an incentive for the Independent Producer to place its interests, or those of the Insurer, or any Affiliate or Related Entity, ahead of the interests of the Retirement Investor. The Insurer’s procedures identify and eliminate quotas, appraisals, performance or personnel actions, bonuses, contests, special awards, differential compensation, or other similar actions or incentives that are intended, or that a reasonable person would conclude are likely, to result in recommendations that are not in the Retirement Investor’s Best Interest, or that subordinate the interests of the Retirement Investor to the Independent Producer’s own interests, or those of the Insurer, or to make recommendations based on the Independent Producer’s considerations of factors or interests other than the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor.

(3) The Insurer’s policies and procedures include a prudent process for determining whether to authorize an Independent Producer to sell the Insurer’s annuity contracts to Retirement Investors, and for taking action to protect Retirement Investors from Independent Producers who have failed or are likely to fail to adhere to the Impartial Conduct Standards, or who lack the necessary education, training, or skill. A prudent process includes careful review of customer complaints, disciplinary history, and regulatory actions concerning the Independent Producer, as well as the Insurer’s review of the Independent Producer’s training, education, and conduct with respect to the Insurer’s own products. The Insurer must document the basis for its initial determination that it can rely on the Independent Producer to adhere to the Impartial Conduct Standards, and must review that determination at least annually as part of the retrospective review set forth in subsection (d) below.

(4) Insurers must provide their complete policies and procedures to the Department within 10 business days of request.

The insurance carrier must also conduct a retrospective review, at least annually, that is reasonably designed to detect and prevent violations of, and achieve compliance with the conditions of the exemption, including the Impartial Conduct Standards, and the policies and procedures governing compliance with the exemption, including the effectiveness of the supervision system, the exceptions found, and corrective action taken or recommended, if any. The retrospective review must also include a review of Independent Producers’ rollover recommendations and the required rollover disclosure. As part of this review, the Insurer must prudently determine whether to continue to permit individual Independent Producers to sell the Insurer’s annuity contracts to Retirement Investors.

Insurance carriers will also be required to conduct a more comprehensive review of Independent Producers to determine if they are eligible to be contracted with the insurance carrier.

+ Next Steps

As noted above, this is a proposal from the DOL and is not yet effective. It is anticipated that the insurance industry will vigorously challenge the proposed changes and the DOL will likely make changes prior to publishing a final rule several months from now.