The US Department of Labor has released its package of proposed changes to the regulation defining fiduciary advice and to the exemptions for conflicts and compensation for investment advice to plans, participants (including rollovers), and IRAs.

This post discusses the likely impact of the new proposals. Future posts will go into more detail about the proposals and compliance issues:

The proposed fiduciary regulation—called the “Retirement Security Rule”–defines nondiscretionary fiduciary advice as follows: The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest; or

Comment: This definition means that one-time investment recommendations by financial professionals will be fiduciary advice. Think about the circumstances where one-time investment recommendations can be given by financial professionals to retirement investors: a rollover recommendation (which is the equivalent of a recommendation to a participant to sell the investments in the participant’s account); a recommendation how to invest the rollover money in an individual retirement annuity or account; a recommendation to transfer an IRA from another firm or annuity to an individual retirement account or individual retirement annuity for which the financial professional will receive a commission or a fee. All of those recommendations, and more, will be fiduciary advice, subject to the twin fiduciary duties of care and loyalty and to the prohibited transaction limitations (and therefore which will require compliance with the conditions of an exemption, such as Prohibited Transaction Exemption (PTE) 2020-02 or PTE 84-24).

In my experience, most broker-dealers and investment advisers are already complying with the conditions of PTE 2020-02 for conflicts due to fiduciary recommendations related to the purchase, sell or transfer of securities. (Even there, the proposals include changes—relatively minor—to the conditions of PTE 2020-02. Those changes are for a future article.)

However, broker-dealers and investment advisers should take this opportunity to review their 2020-02 compliance policies and practices to ensure that they fully satisfy the PTE’s requirements. My experience is that, with more experience and informal guidance from the DOL, we now know more about what is expected in complying with and supervising the PTE’s requirements.

On the other hand, insurance agents and insurance companies will need to make significant changes to comply with the proposed requirements if they are finalized in their current form.

The proposals divide insurance agents into two categories and impose different, but similar, compliance requirements on each. In addition, insurance companies selling their policies through those two types of agents will have different compliance burdens.

The two categories for agents are “independent producers” and “employees and statutory employees” of insurance companies. (In the article, I refer to the second category as “career agents”.) While the rules apply to both life insurance policies and annuity contracts sold by independent and career agents, this article focuses on “annuities”.

To be clear, the fiduciary definition is the same for both types of agents, as well as for broker-dealers and investment advisers. The difference lies in the prohibited transaction exemptions.

Under the proposals, career agents will not be able to use PTE 84-24 to protect their commissions (that is, their prohibited conflicts of interest); instead, they will be moved to PTE 2020-02 and will be required to comply with the provisions of that exemption. That move also means that insurance companies, when issuing annuities sold by career agents, will be co-fiduciaries with the career agents and must also satisfy conditions in 2020-02.

Independent producers, though, will be under PTE 84-24. However, it won’t be “your father’s 84-24”; instead, it will be a substantially revised and toughened 84-24 with many requirements similar to 2020-02. (I will get into the details in future articles.) And insurance companies, while not co-fiduciaries for independent agents, will have significantly increased oversight responsibilities.

A significant compliance issue is that many, if not most, independent producers are very small businesses without the compliance infrastructure and without the legal support needed to understand and comply with the rules. To me, that means that insurance companies and intermediaries will need to provide most of the infrastructure, such as training and education; forms and disclosure materials; application materials to enable the insurance company to perform its compliance oversight; data, such as plan information for rollover evaluations; and so on.

Concluding Thoughts

We are in the very early stages of the regulatory process. The proposed regulation and exemptions were just published in the Federal Register. The comment period is now open. After the comments are reviewed, the DOL will draft final rules, which will ultimately become final after they are published in the Federal Register. That process could easily take the next 8 to 9 months.

The next step is for affected parties to file comments to provide information, concerns, alternatives and, yes, even complaints, to the DOL. Hopefully, with insights into the compliance issues and concerns, the DOL will ultimately issue final rules that accomplish their policy goals and which can be implemented efficiently and effectively by the private sector.

Even then, there is likely to be a legal challenge to the new rules. But that is for another day.

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.