Department of Labor “Fiduciary Rule” Update
Bottom Line: We are writing to keep you, our valued distribution partner, informed of recent Department of Labor (DOL) rulemaking that may impact sales in the qualified market. As you may have heard, on February 16, 2021, the Biden Administration allowed a new Prohibited Transaction Exemption (or “PTE”) that was finalized in the final months of the Trump Administration to go into effect. This new PTE, along with accompanying interpretations of longstanding fiduciary rules, together may create new compliance requirements at the producer level. The following information, along with the enclosed short, 5-minute video, will get you up to speed on these new developments and set the stage for more information to be provided to you by the company in short order.
Background: You might recall the Obama Administration’s previous fiduciary rulemaking was vacated in the 5th Circuit, which led to a number of other regulatory bodies stepping in to create new rules, such as the SEC (Regulation Best Interest) and the NAIC (new model “best interest” rule for annuities). Late in the Trump Administration, the DOL provided a proposal for its own rulemaking with a desired impact to align with Regulation Best Interest, while also retaining its own regulatory authority over certain transactions. While there was speculation as to whether the Biden Administration would allow the rulemaking to be finalized without delay, this speculation was put to rest in February 2021 as the new PTE and corresponding interpretations were blessed by the new administration.
New interpretation for longstanding “Investment Advice Fiduciary” test: As part of the original Trump Administration proposal, the DOL issued a new interpretation of the so-called “5-part test” for determining who is an ERISA fiduciary under DOL rules. DOL’s new interpretation indicates that the agency views the 5-part test as more readily met, and in a greater variety of circumstances, than previously. Most draw the conclusion that the re-interpretation has the effect of broadening the circumstances under which DOL will view a producer’s sales activities as fiduciary in nature. This interpretation was re-confirmed by DOL in the final version of the rulemaking and ultimately blessed by the Biden Administration, which allowed the interpretation and related exemption to become effective without delay in February 2021.
Prohibited Transaction Exemption (PTE) 2020-02: Beyond the new interpretation addressed above that was set out in the Preamble to the PTE, the actual text of the rule grants PTE 2020-02, which operates as a new PTE producers and financial institutions can utilize to avoid certain otherwise prohibited transactions related to the receipt of compensation by investment advice fiduciaries. As you might recall, if you qualify as an “investment advice fiduciary” under the 5-part test described above, it is a “prohibited transaction” to receive a commission on the sale of an annuity product unless you also comply with the terms of a “prohibited transaction exemption.” PTE 2020-02 represents one exemption that is available to be used. It requires, among other things, satisfaction of the three impartial conduct standards (best interest advice, no materially misleading statements and receipt of no more than reasonable compensation), a fiduciary acknowledgement, conflict mitigation, documentation requirements, a retrospective compliance review, and a supervising financial institution. While PTE 2020-02 will certainly fit a number of distribution models, we do not intend to utilize this exemption at this time.
PTE 84-24: The DOL noted that PTE 2020-02 is not the only exemption that may be utilized for compliance, and further suggested that PTE 84-24, which does not require the presence of a supervising financial institution, may more readily fit certain distribution models. This exemption requires, among other things, certain disclosures at the time of sale as well as a customer sign-off on those disclosures. As we view this exemption as more workable than PTE 2020-02 for most independent producers, we intend to provide more information about PTE 84-24 in the near future, including compliance training and additional resources that you may use for compliance.
Additional Information: Note that the DOL also extended Field Assistance Bulletin 2018-02 through December 20, 2021, which provides a temporary non-enforcement policy so long as the three impartial conduct standards (as described above) are met. Note also that the DOL has stated that it intends to provide additional guidance about this rulemaking, which may guide compliance efforts. Last, if you work with a broker-dealer, be sure to check with them about their DOL compliance plans as they may differ. Be on the lookout for more information from us as we navigate these new rules. While we can’t provide direct legal advice, we do look forward to providing best in class training and information about these new rules and the impact they may have on you and your business. As always, thank you for your business and your partnership and we look forward to working with you.
Neither North American Company for Life and Health Insurance®, nor any financial professionals acting on its behalf, should be viewed as providing legal, tax, or investment advice. You, your firm or practice, and your client(s) should be advised to rely on their own qualified legal or tax professional.