The definition of “fiduciary” could be changing again.
The U.S. Department of Labor (DOL) announced in mid-June 2021 that it will once again begin the rulemaking process to amend the fiduciary definition for individuals providing advice to employee benefit plans and individual retirement accounts (IRAs).
According to its regulatory agenda, the DOL also will evaluate changes or additions to existing Prohibited Transaction Exemptions (PTEs), possibly including amendments to PTE 84-24, which provides an exemption for an insurance agent to receive a commission paid as result of fiduciary advice given to a plan or IRA holder.
While this announcement is noteworthy for its potential impact on insurance and financial planning professionals, a clear picture of that impact will not likely emerge until the DOL releases its proposed rule(s) in the coming months. The DOL has stated that it hopes to publish a Notice of Proposed Rulemaking in December 2021, with an anticipated 60-day public comment period to follow.
This does not mean you should sit back and relax until the final rule is announced. The DOL will begin enforcing the Trump administration’s rule regarding the fiduciary investment advice exemption Dec. 20, 2021. In short, if you advise clients on rollovers and want to receive commissions, be prepared to pick an available prohibited transaction exemption and get in compliance by Dec. 20, 2021.
Also in the meantime, it’s important for you to stay up-to-date with the latest developments, knowing that changes to the definition of “fiduciary” and anticipated amendments to PTE 84-24 could require changes to your current process and new ways of staying compliant. Staying informed, even amid the uncertainty, will help you make changes when necessary.
To help you, Senior Market Sales® (SMS) will continue to monitor rulemaking efforts and communicate any significant developments as soon as possible. Subscribe to the SMS eNewsletter to receive updates.
While the industry remains in a wait-and-see mode until further announcements are made, read on to understand what you need to know about complying with the changes for now.
The DOL’s latest move comes after the department in December 2020 published the final version of Prohibited Transaction Exemption 2020-02 (PTE 2020-02), a new class exemption that allows those giving fiduciary advice to receive otherwise-prohibited compensation if they follow certain policies and procedures. PTE 2020-02 also included language from the DOL overturning its previous guidance saying that rollover recommendations are categorically not fiduciary advice.
While the financial services industry expected the incoming Biden administration to withdraw the Trump administration’s rule regarding the fiduciary investment advice exemption, the DOL on Feb. 12, 2021, surprised many by announcing that it would allow the regulation to go into effect on Feb. 16, 2021.
Going forward, each rollover recommendation will need to be evaluated according to the particular circumstances to determine whether an advisor or producer is acting as a fiduciary. Whether a fiduciary relationship exists between you and a client – and therefore, whether the fiduciary standard of care applies to you – depends on a variety of facts and circumstances specific to individual situations. In other words, if you’re a financial professional who provides advice to retirement investors, it’s important that you understand any new requirements so that you can ensure you’re in compliance.
Financial advisors and insurance agents have some time to comply, and industry observers expect further clarification from the DOL.
In its Feb. 12th press release, the DOL announced that an existing, temporary non-enforcement policy would remain in place until Dec. 20, 2021. In other words as long as an advisor is following “impartial conduct standards” (acting in the client’s best interest, refraining from making misleading statements, and receiving only reasonable compensation), neither the DOL nor the Internal Revenue Service will pursue action against the advisor.
This temporary non-enforcement policy is intended to allow financial institutions and investment professionals time to develop procedures for implementation of the new exemption. However, since it does not prevent private litigation or actions from other agencies, it does not insulate advisors from all risk. So while it is not necessary to panic, it will be key for advisors to prepare.
Additional clarification could also provide guidance in the future. Following the DOL’s June announcement of its plans to update the definition of “fiduciary,” Phyllis Borzi, the former head of Labor’s Employee Benefits Security Administration under the Obama administration, told ThinkAdvisor she expect the DOL to issue “some additional FAQs since they really want to give the regulated community more guidance on what they’ll expect for them to do to bring themselves into compliance with the conditions of [PTE 2020-02].” She also said she expects the DOL to propose for notice and comment “changes/additions to several existing PTEs to incorporate the impartial conduct standards (especially PTE 84-24 for insurance companies).”
While clarification and/or change is expected, SMS expects that for now, PTE 84-24 will remain the most-appropriate exemption in the insurance context and that the newer PTE 2020-02 will not supersede PTE 84-24 in importance.
If you’re confused as to whether you are acting as a fiduciary when you interact with your clients, it’s no wonder – the definition of “fiduciary” has changed multiple times in the past decade.
President Barack Obama in 2010 directed his DOL to craft a fiduciary rule. The resulting rule expanded the definition of an “investment advice fiduciary” under the Employee Retirement Income Security Act (ERISA) of 1974 to require many more advisors and producers to act as fiduciaries. But that version of the fiduciary rule was vacated by the U.S. Fifth Circuit of Appeals in June 2018 as regulatory overreach, effectively killing it.
The Trump administration’s guidance within PTE 2020-02, while not as far-reaching as the Obama-era fiduciary rule, expanded the fiduciary definition to include certain advisors handling retirement plan rollovers – a move that surprised many.
In the past, advice regarding rollovers has typically been seen by the DOL as a one-time recommendation, and therefore not fiduciary advice. But the DOL abandoned that position within its discussion of PTE 2020-02.
For example, if you recommend a rollover and then intend to meet with that client in the future, the DOL views that as an anticipated ongoing relationship, or the beginning of an investment advice relationship subject to fiduciary standards, explained Brad Campbell, partner at Faegre Drinker in Washington during a webcast on the topic.
Because the new rule essentially tosses out the old notion that most rollovers are not fiduciary advice, you should, going forward, evaluate each rollover according to the particular circumstances to determine whether you’re acting as a fiduciary.
Despite the industry attention due to its impact on rollover recommendations, the Trump administration’s PTE 2020-02 is primarily an exemption to allow investment advice fiduciaries a new method to receive compensation that would otherwise be prohibited under ERISA and/or the IRS Code. PTE 2020-02 is a class exemption that requires financial institutions (including banks, broker-dealers, registered investment advisers and insurance companies) to adopt certain policies and procedures to receive this exemption. Registered representatives and investment advisor representatives (IARs) should consult with their broker-dealers and RIAs for guidance.
Insurance-only agents may not need to use the new exemption, however, because of other existing exemptions, such as Prohibited Transaction Exemption 84-24, or PTE 84-24. PTE 84-24 provides an exemption for an insurance agent to get paid a commission on the sale of an annuity or life insurance contract to a qualified plan participant and individual retirement account (IRA) holder and requires a disclosure document be signed by the owner. The new exemption is an additional way for fiduciaries to receive commissions compliantly, not a new required way that trumps older ones.
In this way, PTE 2020-02 may have little impact on annuity and certain life insurance sales. You may see carriers providing forms for PTE 2020-02 later this year, and you may choose to use that exemption instead of existing ones.
Here’s a helpful way to boil down your obligations to help you move forward. If your dealings qualify you as a fiduciary under the new investment advice regulation, there are two issues:
For the issue of the fiduciary standard of care, you’ll need to document these recommendations to show how the sale or recommendations were developed.
The new investment advice rule comes at a time when other federal and state regulators and industry organizations are making significant progress on issuing various standards, whether called “fiduciary,” “enhanced suitability” or “best interest” standards.
The Securities and Exchange Commission’s Regulation Best Interest, which took effect June 2020, requires that four factors be considered in making a recommendation: the retail customer’s investment profile, potential risks, potential rewards and costs. While separate, PTE 2020-02 is modeled after the SEC’s Regulation Best Interest – an example of how regulations are increasingly aligning.
In February 2020, the Executive Committee of the National Association of Insurance Commissioners (NAIC), the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from all 50 states, the District of Columbia and five U.S. territories, finalized revisions to its suitability in annuity transactions model law. Several states have adopted the model law, which aims to require producers to act in the best interest of the consumer when making a recommendation of an annuity.
SMS is monitoring developments and will keep you informed. You also can visit our DOL Fiduciary Rule Resource Library.