By Gissou Gotlieb, Field Suitability Compliance Officer
It appears we have approached checkpoint 1 and passed it – finally. The roller coaster that has been the Department of Labor’s fiduciary rule finally reached and passed a deadline with concrete marching orders, at least for the next little while. June 9, 2017, had been the extended deadline for the applicability of the rule and the entire industry had been waiting and speculating to see what changes would be in store for us, if any, prior to this date. Fortunately, or unfortunately, the DOL was considerate enough to clarify that there would be no further delay of the initial implementation date more than two weeks before the June 9 deadline, which was far better than their previous attempt of extending the April deadline just days before the due date. So now we know… or do we?
One of the more substantial changes that June 9 brought for insurance products was to extend the availability of Prohibited Transaction Exemption 84-24 (PTE 84-24) to sales of fixed index annuities (FIAs). One little change, such a monumental impact. Just as the DOL had at the last minute required FIAs to be sold under the Best Interest Contract Exemption (BICE) prior to their initial release of the rule in April 2016, they removed the requirement for FIAs to be placed solely under this exemption during the transition period from June 9 to December 31, 2017. While on the surface this may not seem significant, it has been quite significant for the insurance industry, and in particular, the insurance-only producer.
Under BICE, the producer has to be affiliated with a financial institution (FI) and under their supervision. The FI then has a series of responsibilities in which to ensure proper oversight and compliance with the rule. Seeing as FMOs were not included in the definition of a financial institution and leading up to the applicability date no individual or class exemptions had been granted, such an entity was not available for many insurance-only producers. Fortunately, the DOL revised their position for the June 9 applicability date and are permitting FIA sales under BICE or PTE 84-24, which does not require an FI.
So now that FIs are not required for the sale of FIAs during the transition period, are insurance-only producers free from new responsibilities? Definitely not. While as an insurance-only producer you may be relieved that you do not have to find a new FI with which to affiliate, you do shoulder the compliance responsibility of PTE 84-24 and you do still have to act as a fiduciary and comply with the impartial conduct standards effective June 9, 2017.
As a producer you may have heard that during the transition period the DOL and/or other regulators may be more focused on helping with compliance than enforcement. However, it is important that you do not take your responsibility as a fiduciary lightly. The producer is still required to adhere to the new standards of care and make and document important disclosures to the client regarding product fees and considerations, compensation (both cash and non-cash), and to disclose all material facts surrounding the transaction and conflicts of interest. While this may not seem like anything out of the ordinary, the way these must be done and the extent of the information and detail they must cover is new. Additionally, the issue of receiving no more than “reasonable compensation” is something that producers will have to think through and assess individually.
Certain carriers may require and provide their own disclosure document or template for PTE 84-24, some may not provide any such document, and most will likely not require the disclosure document to be sent to them as a part of new business. It is important that you:
- Understand the requirements of the carriers with whom you do business
- Fully map out and disclose all the ways you are compensated and your conflicts of interest related to a particular relationship or transaction
- Ensure that your overall compensation (all-in) is not more than “reasonable”
- Understand your responsibilities and obligations under “fiduciary” and “best interest of client” standards and adhere to them fully
- Maintain all the proper documentation for the required timeframe to support the sale and demonstrate compliance with the rule when questioned
- Understand that while “enforcement” on the part of regulators may generally not be a priority at this time, any blatant non-compliance will be an issue and clients may seek their own course of action in courts should they feel proper standards were not met
If you are still unsure what to do, please contact us. Although you are still most familiar with your own unique situation as related to the rule, we have resources available to help explain the rule and obligations placed on producers. If you are a registered representative or investment advisor representative, please ensure you check with your FI to ensure you understand their unique requirements for either BICE or PTE 84-24 prior to doing business.
Gissou Gotlieb | Field Suitability Compliance Officer
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x134 | Dir: 734.786.6134
Ann Arbor Annuity Exchange and its representatives do not give tax or legal advice. Financial Professionals are encouraged to consult with their own legal counsel for specific legal advice and assistance.
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