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Regulation and Compliance > Federal Regulation > DOL

Insurers work to implement new fiduciary rule

By Arthur D. Postal

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WASHINGTON — The final rule imposing a new fiduciary standard on the sale of investment products by the Department of Labor (DOL) makes “some meaningful improvements” from the proposed rule, a top official of Prudential Financial said this week.

Stephen P. Pelletier, executive vice president & chief operating office of the U.S. business unit of Prudential, said a major change for the company’s adviser unit from the proposed to the final rule is that it made the process for obtaining the required contract under the Best Interest Contract (BIC) exemption “less onerous than it originally was.”

Pelletier made his comments on the conference call with analysts that Prudential hosted Thursday in response to the release of its first-quarter earnings. The questions were asked by Randy Binner of FBR Capital Markets & Co. It marked the most significant comments on the impact of the new DOL fiduciary rule by major insurance issuers since the rule was finalized last month. The rule starts going into effect in April 2017, with final implementation phased in in 2018.

A key issue Binner brought up was the potential apportionment of legal liability between issuers and distributors of variable annuities.

“I’m not going to get into an apportionment of legal liability,” Pelletier said. But, he added, “I would point out that manufacturers [of VAs] will have a responsibility to perform certain processes and provide certain information to distributors so that they can fulfill their obligations under the contract.

“And we are making the necessary preparations to do exactly that,” Pelletier said.

Pelletier added that for annuities, the DOL did attempt to clarify the circumstances under which higher compensation for the sale of more complex products requiring more upfront time by the advisor is permissible, so long as that compensation is reasonable.

“And What that means will play out over time,” Pelletier said. He said the final rule did not include an exemption that would have favored lower cost products, such as index funds over higher-cost, higher-value products.

“So, while these changes could help mitigate adverse impact on the VA sales, we do want to emphasize, we think it’s really still premature to offer any predictions as to what that impact will be.

“That’s going to play out over multiple years through the lens of advisor behavior and firm behavior,” Pelletier said. “So, we’ll see … “

See also:

Prudential exec issues 6-point call for industry transformation

Pru’s Strangfeld: Is the CEO’s pay too high?

Earlier, Binner asked the same questions about potential legal risk associated with sale of VAs  — Will it rest with the wholesaler or the distributor?  — dealing with annuities during the MetLife earnings conference call with analysts.

Eric Thomas Steigerwalt, chairman, president & CEO of MetLife Insurance Company of Connecticut, who heads the company’s annuity issuance unit, noted that MetLife planned to complete sale of its advisor unit, MetLife Premier Client Group to MassMutual, by July. That puts MetLife in a different position than Prudential Financial.

But, Steigerwalt said: “It’s just too early to know where distributors are coming out with respect to the regulation.” Perhaps four to five months from now, MetLife will have a better view of that issue. Right now, “given the fact that this is almost 1,100 pages, we’re just going to have to wait and see what a number of distributors are going to do.”

Pelletier said the final rule permits Prudential to deal on a “negative consent” basis with clients who had accounts established prior to the beginning of 2018. “That’s helpful,” Pelletier said.

“Negative consent” means that under the rule, all issuers, advisers and agents need to do is disclose to customers that they are complying with the law, and don’t have to do anything else unless the customer demands additional information.

The final rule also clarified how proprietary products can be sold to IRA owners, providing that companies address “some significant new requirements,” Pelletier said.

“Again, that’s useful,” Pelletier said, meaning that, for Prudential Advisors, compliance and business processes will change, but the company will be ready for those changes. “We fully expect that unit to continue to play an important role in our distribution strategy,” he said.

For Prudential’s retirement unit, Pelletier said the final rule does contain “meaningfully clearer delineation” between investment advice and investment education. He added that Prudential thinks “that delineation will allow us to continue to offer our asset allocation services to defined contribution, 401 (k) plans.

“It’s come up on other calls about the sales exception for plans with 100 and more participants,” Pelletier said.

The proposed rule changed that to a $50 million or above in assets exemption or threshold. “The bulk of our business focuses in the larger case market and we expect the vast preponderance of our business to continue to qualify for either exemption threshold,” Pelletier said.

In remarks that are consistent with comments from other issuers, Pelletier said that Prudential Financial continues to evaluate the new regulation and potential business impacts including how the firm’s distribution partners will respond.

“The final rule gives us a path forward to implement certain changes to our processes and businesses including in individual annuities, retirement, asset management and our in-house distribution arm, Prudential Advisors,” he said. “While there will be challenges with the new rule, we have a history of adapting to change and will continue to support our customers with innovative solutions to meet their retirement needs.”

See also:

Prudential, MetLife heads respond to disappointing earnings

How the final DOl fiduciary rule will impact advisors

Under the new DOL rule, fee-only RIA plan advisors in driver’s seat

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