The first regulatory issue of the new year is the Department of Labor’s latest version of the Fiduciary Rule and amendments to PTE 8424 and 2020-02. The industry is in an uproar about the latest proposals, but many are questioning if the concern is warranted since the rules may never see implementation.
The quick summary of the proposals includes three parts: 1) an investment advice fiduciary is now defined as one who provides advice or makes a recommendation to a retirement investor; 2) Under PTE 2020-02, retirement investors must be given a description of the best interest standard of care to include information about whether the recommendations will result in any third-party payments to the investment adviser or the firm; and 3) Under PTE 84-24, a one-time recommendation will require the independent agent that recommends the annuity to make the fiduciary acknowledgment and fully disclose the compensation they are paid, which would be limited to commissions or fees.
What do you need to know about this?
For many years, there has been a five-part test to determine whether someone is a fiduciary under the DOL. That has been replaced by only three parts: 1. Discretionary management of the investments in plans, participants’ accounts, and IRAs. 2. “The person making the recommendation represents or acknowledges that they are acting as a fiduciary when making investment recommendations.” 3. “The person either directly or indirectly (e.g., through or together with any affiliate) makes investment recommendations to investors on a regular basis as part of their business, and the recommendation is provided under circumstances indicating that the recommendation is based on the particular needs or individual circumstances of the retirement investor and may be relied upon by the retirement investor as a basis for investment decisions that are in the retirement investor’s best interest.” So now anyone that makes any recommendations about a product or even the selection of other persons to provide investment advice or investment management services is now considered a fiduciary.
Additional types of compensation, other than the insurance sales commission, will be limited. This may eliminate fees and incentives offered by carriers and marketing organizations.
The amended PTE 84-24 would be available only for investment advice that is provided to a Retirement Investor by an Independent Producer who works with multiple insurance companies to sell non-securities annuities or other insurance products not regulated by the SEC. This means that captive agents and registered representatives may not use the exemption.
Disclosures will need to include a fiduciary acknowledgment, complete compensation details, as well as a description of the best interest standard of care, and give basic information about conflicts of interest.
These are just proposals and not the final rules. Many legal experts contend that this violates the same arguments that caused the last version to be overturned by the courts. Congress has already added amendments to bills that would kill the rule; however, President Biden has said he would veto any such bill.
The Commission is accepting comments through January 2, then the department will review the comments and come out with an amended proposal (hopefully) or a final rule. Stay tuned for more….
