Best Interest Standard of Care for Advisors #80: Compliance with PTE 2020-02: Insurance Distribution Issues (Part 2)

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

Key Takeaways

    • The DOL has issued FAQs that generally explain PTE 2020-02 and the expanded definition of fiduciary advice.
    • In FAQ 18, the DOL discusses the application of the requirements to the distribution of insurance products and the impact on insurance companies.
    • However, many insurance companies have decided against using PTE 2020-02 primarily because of the requirement that the insurance companies accept fiduciary status for the recommendations.
    • Instead, most insurance companies are relying on agents using PTE 84-24, and some are providing forms and educational materials to support that usage.
    • Meanwhile, the DOL is working on a further expanded fiduciary definition and a more demanding PTE 84-24 that will increase the oversight responsibilities for covered recommendations by insurance agents.
    • There may be a role for IMOs, FMOs and BGAs in the anticipated revised 84-24 in terms of the oversight of the recommendations by independent agents.


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. My last post, Best Interest #79, covered the general discussion of the rules by the DOL. This article discusses the possible roles for IMOs, FMOs and BGAs:

The insurance company’s responsibility is to oversee the recommendation and sale of its products, not recommendations and transactions involving other insurance companies. If the insurance company adheres to these principles, it should be able to comply with the exemption, regardless of whether it chooses to market its products through a captive sales force, independent agents, or other channels. Insurance companies could also comply with the exemption by creating oversight and compliance systems through contracts with insurance intermediaries such as independent marketing organizations (IMOs), field marketing organizations (FMOs) or brokerage general agencies (BGAs). As one possible approach, an insurance intermediary could eliminate compensation incentives across all the insurance companies that work with the insurance intermediary, assisting each of the insurance companies with their independent obligations under the exemption. This might involve the insurance intermediary’s review of documentation prepared by insurance agents to comply with the exemption, as may be required by the insurance company, or the use of third-party industry comparisons available in the marketplace to help independent insurance agents recommend products that are prudent for their retirement investor customers.

Before the Obama-era fiduciary regulation and Best Interest Contract Exemption were vacated by the Fifth Circuit Court of Appeals, we filed approximately 15 applications with the DOL for IMOs, FMOs and BGAs to serve as fiduciaries for oversight of the recommendations of insurance agents, and particularly of independent agents.

As a result, when PTE 2020-02 became effective last year, we reached out to several of those entities to see if they were interested in assuming a similar role in the new regulatory environment. They were not. However, if the DOL revises 84-24 in the ways that I think they will, the new conditions for the exemption will require additional oversight of the rollover recommendations into annuities. My suspicion (and it’s only a suspicion) is that some of the larger entities will be willing to assume that oversight role because they believe it will give them a significant advantage in the markets.

We shall see.

Concluding Thoughts

For the moment, the insurance industry is relying on PTE 84-24 to provide relief from the new rules. Some insurance companies are providing support—educational materials and forms–to agents for compliance with those rules.

However, if the DOL issues—as I suspect it will—a more demanding 84-24, insurance companies will likely have a greater burden for oversight of sales to plans, participants and IRAs, including rollover recommendations. In that case, IMOs, FMOs and BGAs may need to take on a new responsibility for overseeing compliance for the insurers.

Note, a lawsuit has been filed in a Federal Court in Texas challenging the DOL’s new fiduciary interpretation. It remains to be seen whether the lawsuit will be successful and whether it will takes years to reach its final conclusion, perhaps in the Supreme Court.

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