Attorneys in my practice group have written a summary of the DOL’s decision that the fiduciary rule should apply on June 9, as well as the FAQs and the non-enforcement policy. You can read the summary on our firm website, here:
Department of Labor Releases New Fiduciary Rule Enforcement Policy and FAQs
The Last Word: The Fiduciary Rule Applies on June 9
This is my 48th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
The Department of Labor has announced that it will not further delay the application of the fiduciary rule. As a result, the new fiduciary definition and the “transition” exemptions will apply to investment and insurance advice to plans, participants and IRA owners (“Retirement Investors” of “qualified accounts”) on June 9.
When the DOL announced its decision, it also issued additional guidance, in the form of FAQs and a non-enforcement policy.
For the most part, the FAQs were helpful.
For example, they clarify that certain types of information and conversation are educational, rather than fiduciary. However, FAQ #6 appears to have increased the compliance burden on “Financial Institutions,” such as broker-dealers, RIAs, banks and insurance companies. While the general rule for conflicted advice is that the Financial Institution and adviser must adhere to the Impartial Conduct Standards (see below), that Q&A said that Financial Institutions have additional responsibilities to manage conflicts so that variable compensation does not influence advisers to make recommendations that are not in the best interest of Retirement Investors.
The non-enforcement policy (Field Assistance Bulletin [FAB] 2017-02) provides that the DOL will not enforce the fiduciary standard or the exemptions during the transition period (from June 9 to December 31), so long as the Financial Institution is making diligent and good faith efforts to comply. However, the failure to make diligent and good faith efforts to comply will result in the loss of the benefit of the non-enforcement policy. Also, the IRS and Treasury will not enforce the fiduciary advice prohibited transactions during the transition period, so long as the requirements of the DOL non-enforcement policy are met.
What does this mean?
It means that, beginning on June 9, recommendations of investment or insurance products or services to qualified accounts must be evaluated two ways.
1. Is the recommendation prudent and loyal?
Recommendations to ERISA-governed retirement plans and participants (including rollover recommendations) are subject to ERISA’s prudent man rule and duty of loyalty. ERISA protections apply and claims can be asserted based on breaches of the fiduciary rule.
However, IRAs (other than SEPs and SIMPLEs) are not governed by ERISA and, therefore, the fiduciary standard does not automatically apply (but see the prohibited transactions discussion below).
2. Does the recommendation result in a prohibited transaction and, if so, are the conditions of an exemption satisfied?
Simply stated, any fiduciary recommendation that results in a payment from a third party (such as a mutual fund or an insurance company) or increases the compensation of the adviser or Financial Institution is a prohibited transaction. As a result, an exemption will be needed. The two most common exemptions are 84-24 (which applies to annuities and insurance products) and BICE (which applies to all types of investments and services, including insurance products). Both require that the adviser adhere to the Impartial Conduct Standards. (However, 84-24 has other requirements, including disclosure compensation and written approval by the Retirement Investor.)
This article focuses on transition BICE, since that exemption will be used in most cases.
As explained above, BICE requires that the Financial Institution and adviser adhere to the Impartial Conduct Standards. There are three such standards:
Since one of the conditions of BICE is that the Financial Institution and the adviser adhere to the Best Interest standard of care, the exemption effectively imposes a fiduciary standard of care. In other words, if the Financial Institution and adviser do not satisfy the fiduciary standard, the exemption will be lost and any compensation paid to the Financial Institution and adviser must be restored to the investor’s account. As a result, even though IRAs are not subject to ERISA’s prudent man rule, the exemption has the same effect as if advice to IRAs were subject to ERISA.
Financial Institutions (including broker-dealers, RIAs, banks and trust companies, and insurance companies) need to institute policies and procedures for compliance with these rules, including training of their representatives about how to satisfy the duties of prudence and loyalty.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
The “Real” Requirements of the Fiduciary Rule
This is my 47th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
I have seen articles and heard comments about the fiduciary rule and exemptions that are misleading. The purpose of this article is to clarify the requirements of the fiduciary rule and the related exemptions.
In order to discuss the “fiduciary package” of guidance, we need to divide it into two categories. The first is the transition rule, for the period from June 9 to December 31, 2017. The second category is the final set of the regulation and exemptions, which are scheduled to become applicable on January 1, 2018, and which are being reviewed by the DOL for changes.
The Transition Rules
The transition rules require, in essence, that advisers, and their supervisory entities, “adhere to” the following:
I used the phrase “adhere to” (as the guidance does) to emphasize that there is no contract or disclosure requirement. In other words, it is a conduct-based standard.
Think about it. Beginning on June 9, an adviser’s recommendations to plans, participants and IRAs has to be prudent and loyal; the adviser cannot mislead the retirement investor; and the adviser and supervisory entity’s compensation must be reasonable. The question is, are these reasonable requirements?
However, on January 1, 2018, the full Best Interest Contract Exemption (BICE) will apply. As currently written, it is disruptive of existing practices, and would be expensive to comply with. That is obviously a problem. However, it will likely be revised. Unfortunately, we don’t know what the changes will be. Hopefully, though, they will reduce the compliance burden while maintaining investor protections.
Notice, though, that I referenced needed changes to the Best Interest Contract Exemption, but not to the fiduciary rule. That’s not to say that the fiduciary rule cannot be improved . . . because it can. However, most of the objections are to the Best Interest Contract Exemption and not to the rule. Unfortunately, people put a label on the package of guidance and, when objecting to the fiduciary rule, their complaints are usually about the Best Interest Contract Exemption. That adds to the confusion about the fiduciary standard of care and its requirements, as opposed to the concerns about the conditions in the exemptions.
While there are some concerns about the fiduciary rule itself, for example, some broker-dealers argue that the Securities and Exchange Commission should write a single fiduciary rule for all investment accounts, including both qualified and non-qualified accounts. That raises the issue of whether there is, or should be, a distinction between accounts that are designed for producing retirement income and those that are intended for personal investing. If the answer is “yes,” then investment advice will be different for the two types of accounts, regardless of which agency writes the rules.
To further complicate matters, the main issue is the prohibited transaction rules, which are statutory, rather than regulatory. Neither the SEC, nor FINRA nor the DOL, can issue regulations that conflict with a statute. As a result, even if the standard of care is changed, the prohibited transaction exemptions will continue to be written by the Department of Labor. In other words, the SEC does not have the statutory authority to create exemptions from the prohibited transaction rules.
As concluding thoughts, while the fiduciary regulation and the transition rules for the exemptions will require changes in practices (for example, fiduciary training and documentation), those rules should not be overly burdensome or expensive to comply with. However, that changes on January 1, 2018 when the final exemptions will apply. Fortunately, the DOL will be reviewing the requirements of those exemptions and, hopefully, the requirements will be modified to be more reasonable in terms of the cost and burden of compliance.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
How Does an Adviser Know How to Satisfy the Best Interest Standard?
This is my 46th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
Beginning on June 9, the new “transition” exemptions will apply to investment and insurance (e.g., annuities) recommendations for IRAs. If an adviser and his supervisory entity (the “financial institution”) are “pure” level fee fiduciaries, there will not be a prohibited transaction under the Internal Revenue Code (so long as the fees are reasonable). Two consequences flow from that. First, the adviser and entity will not need to use the Best Interest Contract Exemption (BICE), which means that they will not be bound by the best interest standard of care. Second, their services to the IRA will be regulated by the securities laws, and not by these new rules.
But, if there is a financial conflict of interest (that is, a prohibited transaction, or PT), the adviser and entity (e.g., broker dealer) will need to use an exemption in order to be paid. The most likely exemption is BICE, and one of the conditions is that the adviser and entity adhere to the “best interest standard of care.” But, what is the best interest standard of care? In essence, it is a combination of ERISA’s prudent man rule and duty of loyalty. Literally, it is:
Investment advice is in the “Best Interest” of the Retirement Investor when the Adviser and Financial Institution providing the advice act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, based on the investment objectives, risk tolerance, financial circumstances, and needs of the Retirement Investor, without regard to the financial or other interests of the Adviser, Financial Institution or any Affiliate, Related Entity, or other party.
While advisers to retirement plans are familiar with those concepts, many advisers to IRAs are not. That raises the question, how can those advisers know what is required? The answer is that fiduciary training and education are needed . . . and needed immediately in light of the June 9 applicability date.
What is the basis for the training? Answer: The fiduciary requirements in ERISA. The DOL made that clear in the preamble to BICE:
“The Best Interest standard set forth in the final exemption is based on longstanding concepts derived from ERISA and the law of trusts. It is meant to express the concept, set forth in ERISA section 404, that a fiduciary is required to act “solely in the interest of the participants . . . with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.” Similarly, both ERISA section 404(a)(1)(A) and the trust-law duty of loyalty require fiduciaries to put the interests of trust beneficiaries first, without regard to the fiduciaries’ own self-interest.”
As a result, broker-dealers and others should look to training and education materials based on ERISA’s provisions, DOL regulations and guidance, and ERISA litigation. Those materials should cover the broad concepts and principles, but should also provide detailed education about the information to be reviewed and the processes to be followed, on a step-by-step basis.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
The DOL Fiduciary “Package”: Basics on the Prohibited Transaction Exemptions
This is my 45th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
My last post (Angles #44) discussed the requirements of ERISA’s prudent man rule and of the best interest standard of care for IRAs and plans. This article outlines the requirements of the two prohibited transaction exemptions that will apply to recommendations of investment products and services and insurance products to plans, participants and IRAs (“qualified accounts”). Those two exemptions are:
Before discussing the general requirements of those exemptions, I should point out that not all advisory services require the use of an exemption. For example, if an adviser provides investment services to a plan, participant or IRA for a pure level fee, there is not a conflict of interest, in the sense that the adviser’s compensation remains the same regardless of the investments that are recommended. By “pure level fee,” I mean that neither the adviser, nor any affiliate nor related party (including the adviser’s supervisory entities, e.g., broker-dealer), receives any additional compensation or financial benefit.
If, however, the adviser, or any affiliated or related party, does receive additional compensation, that would be a financial conflict of interest, which is a “prohibited transaction” under ERISA and the Internal Revenue Code. In that case, the adviser would need to take advantage of one of the exemptions: BICE or 84-24. (I should point out that neither 84-24 nor BICE is available where the adviser has discretion over the investments in the plan, participant’s account or IRA. As a result, discretionary investment management must be for a pure level fee or a different exemption must be found.)
Here are some examples of compensation that constitutes a prohibited transaction: commissions; 12b-1 fees; trailing payments; asset-based revenue sharing; solicitor’s fees; proprietary investments; and payments from custodians. If any of those payments, or any other financial benefits (such as trips, gifts, or marketing allowances), are received by the adviser, or any affiliated or related party, partially or entirely as a result of an investment or insurance recommendations, that would be a prohibited transaction.
The most common exemption will be the Best Interest Contract Exemption. During the transition period, that exemption, BICE, requires only that the adviser (and the adviser’s Financial Institution, e.g., the RIA firm or broker-dealer) “adhere” to the Impartial Conduct Standards (ICS). There are three requirements in the ICS. Those are:
The use of the word “adhere” means only that the adviser and Financial Institution must comply with those requirements. There is not a requirement to notify the plan, participant or IRA owner of those requirements, nor is there a requirement during the transition period to enter into a Best Interest Contract.
On the other hand, 84-24 does impose some written requirements. For example, the insurance agent or broker must disclose his initial and recurring compensation, expressed as a percentage of the commission payments. And, the plan fiduciaries or IRA owners must, in writing, acknowledge receipt of that information and affirm the transaction. On top of that, though, the agent must also “adhere” to the Impartial Conduct Standards.
It is my view that Financial Institutions (such as broker-dealers and IRA firms) should, between now and June 9, focus on the fiduciary processes that will be implemented by the home offices (for example, which mutual fund families and insurance products can be sold to “qualified” accounts such as IRAs plans). In a sense, the Financial Institutions will be co-fiduciaries with the advisers and, therefore, share responsibility for the recommendations that are made to the qualified accounts. As a result, Financial Institutions need to have protective policies, procedures and practices in place.
In addition, the home offices of Financial Institutions need to focus on the training of their advisers to comply with the prudent process requirement imposed by the fiduciary rules, including documentation of those processes. While part of a prudent process will be similar to what is currently required under the suitability and know-your-customer rules, these new fiduciary standards place greater emphasis on certain factors, for example, the costs of investments and the quality of the investment management (as well as the financial stability of an insurance company).
With regard to the reasonable compensation requirement, the burden of proof is on the person claiming that the compensation was reasonable. In other words, the burden of proof will be on the broker-dealer, the RIA firm, and the agent or insurance adviser. As a result, advisers and Financial Institutions should have data in place to support their compensation for each investment category that they recommend to plans, participants and IRA owners.
Finally, with regard to 84-24, the required disclosure and consent forms need to be developed and agents need to be educated on the use of the forms, including the disclosure and consent requirements.
Unfortunately, in a short article like this one, I can only discuss some of the requirements. Obviously, there is more than this, but this is a good starting point for understanding the rules and working on compliance with the new requirements.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
The Basic Structure of the Fiduciary Package (June 9)
This is my 44th article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
This article focuses on the fiduciary rule; next week I will discuss two of the exemptions, the Best Interest Contract Exemption and 84-24.
As we all know by now, the DOL’s new fiduciary definition applies on June 9. As a result the following recommendations will be fiduciary acts on and after June 9:
Fiduciary recommendations to plans and participants (including rollover recommendations) will be subject to ERISA’s prudent man rule and duty of loyalty and, therefore, any breaches can be enforced as ERISA claims.
The same is not true for recommendations to IRAs, because the law does not establish a prudent man and duty of loyalty standard of care for advice to IRAs.
However, that is not the end of the story.
Where an adviser provides fiduciary services to an IRA for a level fee (for example, 1% per year and no other benefits or compensation is received), the adviser will be subject to the standard of care established by the securities laws.
But, if the adviser (or his supervisory entity, e.g., a broker-dealer) receives compensation that is a prohibited transaction (e.g., commissions, 12b-1 fees, asset-based revenue sharing, etc.), the adviser and entity will need the protection of a prohibited transaction exemption.
For the rest of this year–the “transition period,” most firms will use the Best Interest Contract Exemption. However, it is not the BICE you have been hearing about over the past year. Instead, it is “transition BICE.” Transition BICE requires that the entity and the adviser only comply with the Impartial Conduct Standards (ICS). The ICS has 3 components: the best interest standard of care, only reasonable compensation, and no materially misleading statements.
In effect the best interest standard of care brings the ERISA prudent man rule and duty of loyalty to IRAs. As a result, advisers and their supervisory entities need to educate themselves on the requirements of a prudent process with a duty of loyalty to the IRA owner. The suitability and know-your-customer requirements are a part of that, but only part.
Some other things to consider are:
These are just some examples. There are others.
But, for the moment, the message is that, beginning on June 9, advisers and their supervisory entities must understand and apply these concepts.
Since the deadline is right around the corner, these are high priority issues.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
BICE Transition: More Than the Eye Can See
This is my 43rd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
As we all know by now, the new, and greatly expanded, definition of fiduciary advice becomes applicable on June 9. That means that almost any investment or insurance recommendation to a plan, participant, or IRA will be a fiduciary act. (The definition of investment recommendations is also very broad, including referrals to investment managers, recommendations to take distributions from plans, and recommendations to transfer IRAs.)
As a result, investment and insurance recommendations to participants and plans must be prudently developed and must be loyal to the plan or participant. But, recommendations to IRAs will not be subject to the prudent man standard of care. Instead, they would be subject to the SEC fiduciary duty for RIAs, FINRA’s suitability and know-your-customer standards for broker-dealers, and state law standards of care for both RIAs and broker-dealers.
However, this story does not end there. When investment recommendations cause a third party to pay compensation to the adviser (for example, commissions or 12b-1 fees), that is a prohibited transaction. Also, when the adviser makes a recommendation that causes the adviser to receive additional compensation (for example, a commission on a securities transaction), that is a prohibited transaction. Because of those prohibited transactions (for recommendations to plans, participants and IRAs), an adviser must satisfy the conditions of an exemption.
During the period from June 9 to December 31, the likely exemption will be “transition” BICE, that is, the transition rule under the Best Interest Contract Exemption. Fortunately, those conditions should be fairly easy to satisfy. In fact, there is only one condition, but it has three parts. The condition is that the adviser (and the adviser’s Financial Institution) comply with the Impartial Conduct Standards (ICS). The three parts of ICS are: (1) The best interest standard of care; (2) no more than reasonable compensation; and (3) no materially misleading statements.
Focusing on the best interest standard of care, that means that the adviser and the Financial Institution must engage in a prudent process to develop investment recommendations and must act with a duty of loyalty to the plan, participant or IRA owner.
However, the purpose of this article is to discuss requirements that aren’t obvious on the face of the ICS. In other words, there is more to the rule than meets the eye. That’s because, in the DOL’s final regulation extending the applicability date of the fiduciary rule, the Department said:
Also note that even though the applicability date of the exemption conditions have been delayed during the transition period, it is nevertheless anticipated that firms that are fiduciaries will implement procedures to ensure that they are meeting their fiduciary obligations, such as changing their compensation structures and monitoring the sales practices of their advisers to ensure that conflicts in interest do not cause violations of the Impartial Conduct Standards, and maintaining sufficient records to corroborate that they are adhering to Impartial Conduct Standards.
In other words, while the explicit compensation requirement of the ICS is that advisers and Financial Institutions cannot receive more than reasonable compensation, the DOL is saying that a Financial Institution’s compensation structures cannot promote investment recommendations that are not in the best interest of the investor. Think about that. One possible interpretation is that, even though the compensation of the adviser can vary, both for similar products (e.g., mutual funds) and among product categories (e.g., mutual funds vs. variable annuities), the variation cannot be so great as to unreasonably promote advice that is inconsistent with the best interest standard of care.
That raises the obvious question, how much is too much?
It’s difficult, if not impossible, to answer that question. Having said that though, I think that the answer will be somewhat like the famous Supreme Court position . . . “You know it when you see it.”
In any event, broker-dealers, RIA firms, and other Financial Institutions should evaluate their compensation practices and consider whether they align with the quoted language.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
Rollovers under the DOL’s Final Rule
This is my 42nd article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
On April 7, 2017 the DOL issued its final regulation on the extension of the applicability date for the fiduciary definition and the related exemptions. This article discusses the impact of those changes on fiduciary status for recommendations to plan participants to take distributions and roll over to IRAs.
In its guidance, the DOL extended the applicability date of the new fiduciary definition from April 10 to June 9, but did not otherwise modify the definition. Since the fiduciary rule defined a recommendation to take a plan distribution as fiduciary advice, any recommendation to take a distribution and rollover to an IRA on or after June 9 will be a fiduciary act. As a result, an adviser will need to engage in a prudent process to develop and make such a recommendation. (For purposes of this rule, an “adviser” includes a representative of an RIA or a broker-dealer, an insurance agent or broker, or any other person who makes such a recommendation and receives compensation, directly or indirectly, as a result. An advisory fee from the IRA or a commission from an annuity or mutual fund are examples of compensation.)
However, more is involved that just the fiduciary rule. A recommendation to rollover is also a prohibited transaction, since the adviser will typically make more money if the participant rolls over than if the participant leaves the money in that plan. Because of the prohibited transaction, the adviser will need an exemption. Under the latest changes to the rules, advisers will probably use a process called “transition BIC,” which is a reference to a transition rule under the Best Interest Contract Exemption. (This process applies only from June 9 to December 31, unless it is extended. But it is likely that, at the least, these requirements will be part of any future exemption.). Transition BIC requires only that the adviser comply with the “Impartial Conduct Standards” (ICS).
The ICS requires that advisers adhere to the best interest standard of care, receive no more than reasonable compensation, and make no materially misleading statements. For this article, let’s focus on the best interest standard. Generally stated it is a combination of the ERISA prudent man rule and duty of loyalty.
So, an adviser must satisfy both ERISA’s prudent man rule (for the recommendation) and the BIC best interest rule (for the exemption). Since the two standards of care are virtually identical, I have combined them for this discussion.
But, that begs the question of, what is a prudent and best interest process?
Specifically, it is that the adviser must act “with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims; . . .”
So, what would a prudent, knowledgeable and loyal person, who is making a recommendation about retirement investing (the “aims” of the “enterprise”), do? The first step is to gather the information needed to make an informed decision. Then that information needs to be evaluated in light of the participant’s needs and circumstances of the participant . . .with a duty of loyalty to the participant.
The only clear guidance from the DOL about what information needs to be gathered and evaluated is found in Q14 in the DOL’s Conflict of Interest FAQs (Part I-Exemptions).
The first part of the FAQ discusses the information needed if the adviser is a “Level Fee Fiduciary.” Basically, the information includes the investments, expenses and services in the plan and the proposed IRA.
But at the end of the FAQ, the DOL explains that those considerations must be evaluated even if the adviser is using regular BIC (as opposed to the Level Fee Fiduciary provision).
Accordingly, any fiduciary seeking to meet the best interest standard (in order to satisfy transition BIC) would engage in a prudent analysis of this information before recommending that an investor roll over plan assets to an IRA, regardless of whether the fiduciary was a “level fee” fiduciary or a fiduciary complying with BIC.
In other words, any adviser making a distribution and rollover recommendation on or after June 9, 2017 must have a process for gathering and evaluating information about the investments, expenses and services in the participant’s plan and in the proposed IRA, and about the participant’s needs and circumstances.
This subject is more complicated than can be covered adequately in a short article, but this is a start for understanding the new rules for distributions and rollovers.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
While We Wait: The Current Fiduciary Rule and Annuities
This is my 41st article about interesting observations concerning the Department of Labor’s fiduciary rule and exemptions. These articles also cover the DOL’s FAQs interpreting the regulation and exemptions and related developments in the securities laws.
As explained in previous posts, the delay of the new fiduciary rule does not mean that we are “rule-less.” Instead, the “old” rule, and exemptions, which have been place for decades, will continue to apply. Does that mean that we are back in the “good old days” where we won’t need to pay attention to the application of the fiduciary rule to IRAs? I don’t think so.
Over the past few years, a tremendous amount of attention has been paid to the meaning and consequences of being a fiduciary . . . and I doubt that we can walk back from that. And, with this newfound attention, it is possible that many common practices will, when closely examined, result in fiduciary status under the old rule.
The consequences of unknowingly being a fiduciary are significant. If a fiduciary recommendation results in the payment of a commission to a fiduciary adviser or insurance agent, that payment would be a prohibited transaction and, absent compliance with any exemptions (e.g.., 84-24), the commission would be prohibited.
For example, the most common reason that advisors and insurance agents haven’t considered themselves to be fiduciaries for annuities is that their services haven’t been rendered “on a regular basis”. In other words, the sales have been viewed as one-time events. Let’s see how that stands up against common practices for sales and servicing of annuities in IRAs.
What about fixed rate (or “traditional”) annuities? It’s possible, perhaps even probable, that the sale of the annuity is a one-time event and that recommendations are not provided on an on-going basis. In that case, these sales would not be fiduciary services. However, if the agent periodically recommends additional purchases, that could result in fiduciary status. (Keep in mind that the definition is “functional” and it doesn’t matter what the agreements say. Instead, the conduct of the advisor is examined.)
What about fixed indexed annuities? Similar to their fixed rate cousins, the sale could be a one-time event and, therefore, not a fiduciary recommendation. On the other hand, if there are ongoing services that would be fiduciary activities, it can result in fiduciary status.
What about variable annuities? The recommendation of a variable annuity may contemplate ongoing fiduciary services, for example, recommendations about the mutual funds inside the annuity and the allocations and reallocations among those investments. In that case, the services could result in fiduciary status and the payment of the commission could be a prohibited transaction. As a result, both advisers and agents should consider using PTE 84-24. (Remember that 84-24, in its old form, is still in effect and that, therefore, all three types of annuities are covered by the exemption.)
So, after you heave a sigh of relief for the delay of the fiduciary rule, it’s time to go back to work on fiduciary issues . . . and an important one is the treatment of the recommendation of annuities to IRAs.
The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Drinker Biddle & Reath.
The DOL has published Field Assistance Bulletin 2017-1, which provides some limited temporary relief while the industry waits to find out if the Fiduciary Rule will be applicable April 10. The Drinker Biddle Employee Benefits and Executive Compensation Group has written a Client Alert, in which we discuss the two scenarios in which the DOL will not take enforcement action for non-compliance with the Fiduciary Rule during this period of uncertainty. We also provide suggestions on how advisers and financial institutions should proceed while we wait to see what happens with the Fiduciary Rule.
