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October 31, 2023 at 05:14 PM
What You Need to Know
- Financial professionals who operate under two major sets of Labor regulations could still collect commissions.
- Professionals who help with IRA rollovers would be subject to the rules.
- DOL officials agree that insurers can regulate independent annuity producers.
- The draft rules for independent producers would apply to products other than annuities.
New draft regulations released Tuesday by the U.S. Department of Labor would let annuity sellers continue to earn commissions for selling non-variable indexed annuities.
Independent agents who operate under one set of Labor Department regulations, Prohibited Transaction Exemption 84-24, would have to become fiduciaries, but they could continue to earn commissions. They would have to disclose their initial commissions and renewal commissions, both in terms of dollar amounts and as a percentage of the premium payments.
Similarly, agents who are more closely affiliated with insurers, broker-dealers or investment companies, and who operate under a second set of Labor Department regulations, Prohibited Transaction Exemption 2020-02, would have to provide a notice acknowledging that they would receive commissions or other transaction-based compensation and offering to provide specific compensation information, for free, upon request.
Insurers and other financial institutions could not use any sales contests, quotas, travel incentives or other non-cash compensation that might cause the independent producers using PTE 84-24 or the investment professionals subject to PTE 2020-02 to have any incentive other than meeting the client’s needs.
What it means: Officials at the Employee Benefits Security Administration, the arm of the Labor Department that oversees employee benefits and administration of the Employee Retirement Income Security Act of 1974, were listening when insurance groups told them that commission-based transactions are better than fee-based transactions for some clients.
“Certainly, in many cases, it is in the retirement investor’s best interest to receive advice from investment professionals that are compensated through commissions incurred on a transactional basis, rather than as part of an ongoing fee-based relationship (for example, pursuant to an advisory relationship subject to a recurring charge based on assets under management),” EBSA officials wrote in the preamble, or official introduction, to the proposed update to PTE 2020-02.
“In such cases, the fact that the investment professional received a commission for their services is not inconsistent with the principles set forth herein,” officials said. “Conversely, a recommendation to enter into a fee-based arrangement may, in certain cases, be inconsistent with the Best Interest standard.”
Employee Retirement Income Security Act: The Employee Benefits Security Administration and its parent department are involved in retirement investment regulation because a provision in the Employee Retirement Income Security Act sets a fiduciary rule standard for most large benefit plans and most plans that operate across state lines.
The fiduciary rule requires employers and other parties involved in providing benefits to put the participants’ interest first.
The department issues regulations that are called “prohibited transaction exemptions,” or PTEs, because it often creates holes in the fiduciary rule standard to allow necessary retirement plan management activities that otherwise would be difficult to perform under a strict fiduciary standard.
PTE 84-24 applies to financial professionals who are not under what the Labor Department classifies as being the supervision of a financial institution, and PTE 2020-02 applies to financial professionals who are under the supervision of a financial institution.
The department interprets ERISA to mean that it has a role in regulating all rollovers from 401(k) plans or other retirement accounts into retirement savings and investment products.
Fiduciary rule fight: Labor Department officials have used a “five-part” test to oversee the parties involved in running benefit plans and to determine whether they are fiduciaries.
Officials complained in the preambles to the new regulations that the current fiduciary definition based on the five-part test is such a poor fit for the modern world that it may complicate the lives of financial professionals handling minor transactions, but not apply at all to agents who persuaded retirees to roll their entire 401(k) plan account balances into annuities.
The department posted draft retirement plan fiduciary rule updates, including regulations that might have banned or sharply limited annuity sales commission payments, in 2015, and completed it in 2017.
Annuity issuers went to court to fight the regulation, an appeals court killed it and the Trump administration let the regulation die.
The U.S. Securities and Exchange Commission tried to fill the gap by releasing Regulation Best Interest, a batch of regulations requiring annuity sellers to put the customers’ interests first and also appearing to allow the use of sales commissions.
The National Association of Insurance Commissioners then adopted a model regulation update, which has already been approved by more than 40 states, that wraps around Reg Bi and allows use of annuity sales commissions.
