While We Wait: The Current Fiduciary Rule and Annuities

This is my 41^st 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 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.