Regulatory Hot Topics

+ DOL Overview

The Department of Labor (DOL) issued a final Prohibited Transaction Exemption (PTE) that will allow conflicted compensation resulting from nondiscretionary fiduciary investment advice. The PTE is titled “Improving Investment Advice for Workers & Retirees.” It became effective on February 16, 2021.

There are certain prohibited transactions under Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code of 1986, as amended (“the Code”). These prohibited transactions generally prohibit financial institutions (RIAs, broker-dealers, banks, and insurance companies) and their individual employees, agents, and representatives, that are investment advice fiduciaries from receiving compensation with respect to certain ERISA retirement plans and IRAs from third parties in connection with transactions involving ERISA retirement plans and IRAs.

Under the new rule, the Department of Labor (DOL) has created exceptions called Prohibited Transaction Exemptions (PTEs) that allow an investment advice fiduciary to receive compensation if the conditions of the PTE are met.

In summary, if someone is an investment advice fiduciary, they need to use a PTE.

+ Which PTE will I need to utilize?

This will depend on a number of factors. Here are two of the most common PTEs for our industry:

PTE 2020-02:

The DOL has created a new PTE 2020-02. It involves significant requirements including, but not limited to, adherence to Impartial Conduct Standards (act in the best interest of the client, receive reasonable compensation, and make no materially misleading statements), additional disclosure to the client, retention requirements, and supervisory requirements for financial institutions.

PTE 84-24:

The DOL also re-affirmed that an older version of PTE 84-24 is available for use with insurance and annuity transactions. This is different that the version of PTE 84-24 that was created by the “DOL Fiduciary Rule” in 2016. Do not use the PTE 84-24 disclosure form that was created for use under the Obama administration.

PTE 84-24 essentially requires a written disclosure that is signed by the client. Generally speaking, there are four items involved in the disclosure:

• The relationship of the agent and the insurance carrier and if there are any limitations
• The commission to be received by the agent, as a percentage of gross annual premium payments for the first year and for each of following years
• A description of any charges, fees, discounts, penalties or adjustments which may be imposed under the recommended contract
• Client acknowledgement, in writing, of the receipt of such information and approval of the transaction

Check with your financial institution(s) to determine which PTE you will need to utilize and the related requirements.

+ What if I’m an insurance-only producer?

PTE 84-24 is less burdensome that PTE 2020-02. Most insurance carriers that utilize independent distribution do not choose PTE 2020-02. That generally means an insurance only producer must rely on PTE 84-24 for life and annuity transactions.

However, it is important to remember that regardless of what the DOL may require in certain circumstances, and regardless of how the DOL may refer to an insurance-only producer (for example, as an investment advice fiduciary), the DOL rule does not supersede existing securities and insurance regulations. Insurance-only producers generally may not make recommendations involving securities and may not refer to themselves as providing investment advice. This is commonly deemed to be providing investment advice without the proper registration and is prohibited. Consult with the individual states in which you conduct business to ensure you are following their registration requirements.

Check with the insurance carrier(s) with whom you do business to determine whether you will need to rely upon PTE 84-24 or a different PTE.

+ What if I'm an RIA?

The DOL permits conflicted fiduciary advice to ERISA retirement plans, participants and IRAs resulting from nondiscretionary recommendations. (Prohibited transactions resulting from discretionary investment management are not exempted.) While level fees ordinarily do not constitute prohibited transactions, some advice by investment advisers does involve conflicts of interest, (e.g., recommendations to IRA owners that result in revenue sharing payments to the advisory firm from custodians). Also, a rollover recommendation can involve a conflict of interest even where the adviser charges a level fee. This because the RIA firm and the adviser usually receive more compensation if a participant accepts the recommendation and rolls the money in his account into an IRA with the adviser.

Check with your RIA to determine which PTE they will require you to utilize and the related requirements.

+ When do I need to comply?

The DOL rule became effective on February 16, 2021. However, the DOL has extended its “non-enforcement” policy under Field Assistance Bulletin 2021-02 through January 31, 2022 for investment advice fiduciaries who are working diligently and in good faith to comply with the Impartial Conduct Standards under PTE 2020-02. The DOL also extended its “non-enforcement” policy for certain disclosure and documentation requirements under PTE 2020-02 through June 30, 2022.

For those relying upon PTE 84-24, the effective date was February 16, 2021.

+ Next Steps

The foregoing information is based solely on what has been released at this time. There is also a possibility that the DOL will revise the rule again in the near future. It is anticipated that a revised rule would be more burdensome than the existing requirements.

+ NAIC Model Reg 275

States are adopting the NAIC Model Reg 275: The NAIC adopted changes to the Suitability in Annuity Transactions Model Regulation (“Model Regulation”), sometimes referred to by its number which is 275, in February of 2021. The revisions included a “best interest” standard to replace the suitability standard.

The Model Regulation includes four “obligations” that must be met if a producer is acting in the best interest of a client:

Care
The producer, when making a recommendation, must exercise reasonable diligence, care, and skill to know the consumer’s financial situation, insurance needs, and financial objectives. The producer must not put his/her financial interests or the insurance carrier’s financial interests ahead of the consumer’s interests. The producer must make reasonable efforts to gather “consumer profile information” from the consumer. Consumer profile information is considered the minimum amount of information a producer should gather before making a recommendation. There are 14 items listed under the definition of consumer profile information.

It is also required that the producer understand the annuities that the producer can offer, and the producer must have a reasonable basis to believe the recommended annuity effectively addresses the consumer’s financial situation, insurance needs, and financial objectives over the life of the product.

The producer does not have to examine every possible annuity in the marketplace and is able to recommend one that the producer is currently able to offer, as long as the recommended annuity is in the best interest of the consumer. There is no requirement to obtain additional licenses or to recommend the lowest commission product, but the recommendation must be in the best interest of the consumer.

Disclosure
The producer must prominently disclose specific information to the consumer. Some of the items that need to be disclosed include the scope of the relationship with the consumer and the role of the producer, a statement of whether the producer is licensed and authorized to offer certain products, a range of how many insurers the producer sells products for, a description of the sources and types of cash and non-cash compensation to be received by the producer, and a notice of the consumer’s right to request additional information about cash compensation. The Model Regulation provides a sample form that can be utilized. In addition, the producer must have a belief that the consumer has been adequately informed of the various features of the annuity.

Conflict of Interest
The producer must identify and avoid, or reasonable manage and disclose, any material conflicts of interest.

Documentation
The producer must document any recommendation that is made and the basis for the recommendation. This requires the producer to document his/her analysis of the consumer’s financial situation, insurance needs, and financial objectives, the analysis to determine what product or products to recommend, how the recommended product meets the financial situation, insurance needs, and financial objectives of the consumer, and why it is in the best interest of the consumer.

The requirements of the Model Regulation also apply to all producers who have exercised material control or influence over the making of a recommendation and have received direct compensation as a result of the recommendation or sale, regardless of whether or not the producer has had any direct contact with the consumer. For example, if two producers work on a case and split the commission, both producers are required to adhere to the requirements of the Model Regulation, even if only one of the producers met with the consumer.

Want to ensure you and your producers are compliant with NAIC Model Reg 275? Contact us for more information on how we can help.