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The Employee Benefits Security Administration (EBSA) has unveiled a new sales standard proposal that could affect investment advice fiduciaries that help retirement savers roll cash from retirement plans into individual retirement accounts (IRAs).

EBSA is an arm of the U.S. Department of Labor (DOL), and the new draft is likely to set off a new wave of battles over who should regulate annuity sellers, and how.

Resources

  • A copy of the standards notice is available here.
  • Links to that document and related documents, such as a fact sheet summary, are available here.
  • An article about a new federal court Reg BI court ruling is available here.

DOL Secretary Eugene Scalia said in a comment in the proposal release announcement that the EBSA approach would give individuals the information they need to make good decisions.

The proposal “would give Americans more choices for investment advice arrangements, while protecting the retirement savings of American workers,” Scalia said.

EBSA is preparing to publish the proposal in the Federal Register and has posted a preliminary version on its own website.

Here are seven things to know about the new EBSA proposal, for financial professionals involved with annuities.

1. The new proposal is part of a long-running financial services sales standard fight.

The proposed standard is part of a long-running battle over how federal and state regulators should handle annuities, and between some fee-based advisors, who want anyone offering financial advice to abide by very strict standards, to avoid any hint of bias, and many commission-based financial representatives, who say that many consumers prefer to work with financial professionals without having to pay a fee.

The Employee Retirement Income Security Act of 1974 (ERISA) includes a provision requiring people involved with retirement plan assets to act as “fiduciaries,” and to make decisions in the best interest of the plan participants.

Critics argued that a “five-part test” used to apply the ERISA fiduciary provision was too vague and let commission-based con artists loot consumers’ retirement accounts.

When Barack Obama was president, the Labor Department completed work on a fiduciary rule regulation that would have imposed very strict, detailed requirements on indexed annuity sellers.

When Donald Trump became president, the department stopped defending the Obama-era approach to financial services sales standards, and the Obama-era DOL approach died in court.

The U.S. Securities and Exchange Commission is now implementing an alternative to the doomed DOL standard, Regulation Best Interest, or Reg BI, which imposes new disclosure requirements but continues to allow companies to pay commissions.

Many financial planner groups, investor groups and consumer groups have opposed the Reg BI-based approach, arguing that it does too little to curb aggressive, commission-driven sales practices.

The National Association of Insurance Commissioners (NAIC) has completed work on an annuity sales standards model that’s meant to be compatible with Reg BI. New York state has openly opposed the NAIC model. California has indicated concerns about the model but voted for adoption. Iowa and Arizona have both adopted the NAIC model.

The new DOL proposal would appear to be compatible with both Reg BI and the NAIC model.

2. Comments will be due 30 days after the official Federal Register publication date.

Preston Rutledge, the previous EBSA head, left the agency at the end of May.

Jeanne Klinefelter Wilson is now the acting assistant secretary of Labor who’s in charge of EBSA. Before she began working for EBSA, in 2017, she was a benefits lawyer at Continental Airlines and Waste Management and a benefits lawyer at Groom Law Group.

EBSA lists Susan Wilker and Erin Hesse as the proposal contact people.

3. The proposal is actually a “prohibited transaction exemption,” or PTE.

The proposal would allow transactions that normally would be prohibited by ERISA and by the Internal Revenue Code of 1986 (IRC).

EBSA reports an impact analysis that the PTE could apply to 3,764 broker-dealers, 12,940 investment advisors who are registered with the SEC, 16,939 advisors who are registered with state regulators, and 386 insurers that write at least some annuities.

4. The proposal is based on an ‘Impartial Conduct Standards’ framework.

“Impartial Conduct Standards” include a standard requiring a retirement fiduciary to act in the best interest of the retirement saver; a reasonable compensation standard; and a requirement for people subject to the requirements to make no materially misleading statements.

5. EBSA says the exemption would apply to retirement plan-to-IRA rollovers.

 

EBSA says the PTE would be available to “registered investment advisers, broker-dealers, banks, and insurance companies … and their individual employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement Investors.

The proposal defines “retirement plan investors” as participants in and beneficiaries of 401(k) plans and other similar types of retirement plans, IRA owners, and retirement plan and IRA fiduciaries.

The proposal would apply to prohibited transactions arising as a result of investment advice to roll over assets from a retirement plan to an individual retirement account (IRA).

Officials note that retirement savers may have rolled over about $2.4 trillion in plan assets into IRAs from 2016 through this year.

The exemption would also let financial institutions, such as life insurers, engage in principal transactions with plans ad IRAs in which the financial institution buys or sells certain investments from its own account.

Arrangements in which all advice was provided by a computer model might not be eligible for relief under the exemption, but EBSA is asking for comments on that point.

The exemption would also not apply to a retirement plan’s “named fiduciary,” such as a plan administrator, unless the sponsor chose the same company to provide investment advice.

6. EBSA says agents could still collect sales commissions, and many other forms of revenue.

Under the proposal, insurers and agents could get commissions, trailing commissions, sales loads, markups, markdowns, and revenue-sharing payments from investment providers or third providers,

7. The proposal could make various types of annuity distributors more important.

To qualify for the exemption, agents and life insurers would have to provide advice in accord with the Impartial Conduct Standards.

Life insurers would have to acknowledge their fiduciary status and their agents’ fiduciary status, in writing, when they and their agents were working with investors, and the life insurers would have to “adopt policies and procedures prudently designed to ensure compliance with the Impartial Conduct Standards and conduct a retrospective review of compliance.”

Life insurers with agents or brokers who work for multiple companies could supervise the producers, or they could have other organizations, such as independent marketing organizations (IMOs), field marketing organizations (FMOs) or brokerage general agencies (BGAs).

EBSA notes that IMOs, FMOS and BGAs that are investment advice fiduciaries can “apply for relief for the receipt of compensation in connection with the provision of investment advice on the same conditions as apply to the financial institutions covered by the proposed exemption,” according to the proposal text.

— Read DOL Floats Revised Fiduciary Rule to Align With Reg BIon ThinkAdvisor.

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