By Heath Waddington, Senior Vice President of Sales & Marketing
At least we know, right? We are now several weeks into the DOL fiduciary rule transition period that moves the sale of financial products, when dealing with qualified money, to a best-interest standard. This is a big change, but we are still in the transition period that has its own specified requirements, which will change again on January 1, 2018, when the remaining aspects of the rule become applicable.
Before we get into what producers in the field should be doing to comply with the rule, it is important to note how the status of fixed index annuities (FIAs) and where they fall within the rule has changed… multiple times!
When the proposed rule was first published in April of 2015, it was determined that producers could still receive commissions on the sale of certain financial products by using one of two exemptions, the Best Interest Contract Exemption (BICE) or the Prohibited Transaction Exemption (PTE) 84-24. At that time FIA sales were to fall under PTE 84-24. When the rule was officially released in April 2016, FIAs had been moved to the BICE. This move was significant as the BICE had been considered the more onerous of the two exemptions at that time.
Under the BICE a contract is established between a Financial Institution (FI) and the client. This contract ensures that the transaction was in the best interest of the client without regard to the compensation of the producer. When published, it was theorized that the enforcement mechanism would likely be trial lawyers because the rule was written to allow for class action lawsuits. The DOL named banks, broker/dealers, registered investment advisors, and insurance companies as FIs. They have also mentioned that if certain criteria are met, they may approve an additional category of FI, such as marketing organizations, to act in such a capacity allowing them to supervise insurance-only producers and to sign the best interest contract. As of the date of this article, the DOL has not approved third-party intermediaries to act as a Financial Institution.
When the delay was announced in April of 2017, FIAs were allowed once again to be sold under PTE 84-24 in order for the producer to receive commissions. In fact, according to the rule, FIAs can be sold under either exemption from now until January 1, 2018, during the transition period. However, the producer’s registration and directives from the producer’s FI may dictate which exemption is used for each individual producer. That being said, many broker/dealers have chosen to use the Transition BICE during the lead-up to January 1 as they may already have a robust supervisory structure in place.
So what does a producer have to do to be in compliance with PTE 84-24 during the transition period?
Impartial Conduct Standards
First of all, the producer must adhere to the Impartial Conduct Standards defined by the DOL. Within these standards the producer:
- Must act with a best-interest standard of care.
- Cannot receive more than reasonable compensation.
- Must make no materially misleading statements, including about any material conflicts of interest.
According to the rule, under PTE 84-24, an insurance agent “…that is a fiduciary acts in the ‘Best Interest’ of the Plan or IRA when the ﬁduciary acts 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 Plan or IRA, without regard to the ﬁnancial or other interests of the ﬁduciary, any affiliate, or other party.”
Regarding reasonable compensation, PTE 84-24 does not define specifically nor provide any other guidance on which the producer may rely to determine what constitutes reasonable compensation. Reasonableness depends on the particular facts and circumstances at the time of the fiduciary advice recommendation. The essential question is whether the compensation received by the producer is reasonable in relation to what the client stands to receive for his or her money. No single factor alone proves whether compensation is reasonable. In earlier guidance, the DOL has noted that it believes that the concept of reasonable compensation is and will continue to be market-driven. We will continue to watch for additional guidance in this area from the DOL and anticipate this will be the topic of future AAAE articles.
Finally, the producer may make no materially misleading statements. This covers everything from the way in which you refer to yourself (such as titles and designations), to advertising and marketing materials, to emails with clients. While this requirement may be considered to be self-evident, please note that PTE 84-24 specifically notes that an insurance agent’s “…failure to disclose a Material Conflict of Interest relevant to the services it is providing or other actions it is taking in relation to a Plan’s or IRA owner’s investment decisions is considered a misleading statement.”
Required written disclosures
PTE 84-24 also requires that the producer provide specific written disclosures to the client prior to the execution of a transaction. The following must be disclosed (in one or more written disclosures):
- If the producer is an affiliate of the insurance company whose contract is being recommended, or if the ability of the insurance agent to recommend insurance or annuity contracts is limited by any agreement with that insurance company.
- The sales commission, expressed as a percentage of gross annual premium payments for the first year and for each of the succeeding renewal years, that will be paid by the insurance company to the producer.
- A description of any charges, fees, discounts, penalties, or adjustments which may be imposed under the recommended contract.
- Any material conflicts of interest (see above discussion within the Impartial Conduct Standards).
PTE 84-24 further requires that the client acknowledge in writing the receipt of the above information and approve the transaction.
One of the main aspects of PTE 84-24 is that compliance is the responsibility of the individual producer. In other words, it is the producer’s responsibility to make sure that he or she adheres to the Impartial Conduct Standards and that the required disclosures and client approvals are made. While many carriers may provide disclosure forms that will cover disclosure #3 above (the charges, fees, discounts and penalties within the product), it is up to the producer to complete them by providing the disclosures described in 1,2, and 4 above. Further, it is the producer’s responsibility to have the client sign these disclosures to acknowledge receipt of them and approve the transaction. This disclosure is not required to be sent to any of the insurance carriers that AAAE works with. In accordance with the way that PTE 84-24 is written, it is between the producer and client and is to be maintained by the producer for six years. Please note that several carriers have provided samples of potential disclosures for producer use. Please contact AAAE for links to those samples. As always, you are also encouraged to seek your own legal counsel.
What will happen on January 1?
As of right now, things are set to change on January 1, 2018. At that point the full BICE will go into effect. Also, and more importantly, FIAs will fall under the BICE and PTE 84-24 will no longer be available for such sales. This means that anyone selling an FIA would need to be affiliated with a Financial Institution in order to have the best interest contract signed and receive commissions on the transaction. It is important that producers keep in touch with AAAE as we approach the end of the year to discuss what their options may be moving forward. Those options may include getting registered with a broker/dealer or registered investment advisor. AAAE can help facilitate this. As mentioned above, the DOL is contemplating an exemption to allow marketing organizations to become FIs. AAAE has a sister organization that has begun the process of working towards this, and assuming this exemption is granted, another option for some insurance-only producers may be to affiliate with our FI to be able to continue to sell FIAs under the BICE.
In the meantime, the DOL has published a formal Request for Information asking for specific input on whether the January 1, 2018, date should be further pushed back, and also for additional input on potential changes to the fiduciary rule. We will keep you posted as developments progress on this important topic.
Heath Waddington | Senior Vice President of Sales & Marketing
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x140 | Dir: 734.786.6140
Ann Arbor Annuity Exchange does not provide tax or legal advice. You are encouraged to consult your tax advisor or attorney.
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