The Department of Labor’s “Fiduciary Rule,” PTE 2020-02: The FAQs

Background

The DOL’s prohibited transaction exemption (PTE) 2020-02 (Improving Investment Advice for Workers & Retirees), allows investment advisers, broker-dealers, banks, and insurance companies (“financial institu­tions”), and their representatives (“investment professionals”), to receive conflicted compensation resulting from non-discretionary fiduciary investment advice to ERISA retirement plans, participants (including rollover recommendations), and IRA owners (“retirement investors”). In addition, in the preamble to the PTE the DOL announced an expanded definition of fiduciary advice, meaning that many more financial institutions and investment professionals are fiduciaries for their recommendations to retirement investors and, therefore, will need the protection provided by the exemption.

The DOL has issued FAQs providing additional guidance about the requirements in PTE 2020-02. In Question 18, the DOL discusses how the requirements apply to insurance companies.

Q18. How can insurance industry financial institutions comply with the exemption?

The Department is aware that insurance companies often sell insurance products and fixed (including indexed) annuities through different distribution channels than broker-dealers and registered investment advisers. While some insurance agents are employees of an insurance company, other insurance agents are independent, and work with multiple insurance companies. PTE 2020-02 applies to all these business models.

When an independent insurance agent recommends an annuity under the exemption, the agent and the financial institution (e.g., the insurance company) must satisfy the exemption’s conditions, including the fiduciary acknowledgement and the Impartial Conduct Standards with respect to that transaction. In such cases, the insurance company must ensure that it has adopted policies and procedures to ensure compliance with the Impartial Conduct Standards and to avoid incentives that place the firm’s or agent’s interests ahead of the interests of retirement investors.

While the independent agent may recommend products issued by a variety of insurance companies, PTE 2020-02 does not require insurance companies to exercise supervisory responsibility with respect to the practices of unrelated and unaffiliated insurance companies. When an insurance company is the supervisory financial institution for purposes of the exemption, its obligation is simply to ensure that the insurer, its affiliates, and related parties meet the exemption’s terms with respect to the insurance company’s annuity which is the subject of the transaction.

Under the exemption, the insurance company must:

• adopt and implement prudent supervisory and review mechanisms to safeguard the agent’s compliance with the Impartial Conduct Standards when recommending the insurance company’s products;
• avoid improper incentives to preferentially recommend the products, riders, and annuity features that are most lucrative for the insurance company at the customer’s expense;
• ensure that the agent receives no more than reasonable compensation for its services in connection with the transaction (e.g., by monitoring market prices and benchmarks for the insurance company’s products, services, and agent compensation); and
• adhere to the disclosure and other conditions set forth in the exemptions.

In a footnote to FAQ 18, the DOL also said:

 In addition to relying on PTE 2002-02 for relief from prohibited transactions, insurers and agents may also rely on PTE 84-24, which provides relief for a smaller range of compensation practices, including the insurance agent’s receipt of a sales commission from an insurance company and the insurance company’s receipt of compensation and other consideration in connection with annuity sales, provided the conditions of the exemption are satisfied.

Concluding Thoughts

While PTE 2020-02 theoretically provides relief for insurance companies, as well as insurance agents, that hasn’t proven to be the “real world” case. That is partially because 2020-02 requires that the insurance company be a “co-fiduciary” with the agents, which isn’t tenable, particularly in the case of independent agents. The historical relationship doesn’t involve the degree of oversight needed to insurance companies to have fiduciary responsibility for the recommendations of the agents.

So, for the moment, almost all insurance companies are contemplating, in one way or another, that insurance agents will comply with the requirements of PTE 84-24 for covered recommendations. Those recommendations are primarily recommendations to rollover participant accounts to annuities or to transfer IRAs (i.e., individual retirement accounts or annuities) to an individual retirement annuity with the agent.

But, what about IMOs, FSOs and BGAs?  That is the subject of my next article.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.