Final DOL Agent Fiduciary Exemption Covers More Comp Types

The Labor Department's free zone for independent annuity producers under its is more flexible than what the department proposed in the fall, according to a team of retirement services lawyers at Groom Law Group.

Originally, the department would have created a fiduciary standard exemption from its new rollover advice regulations only for independent producers collecting insurance sales commissions, the team says in commentary.

The exemption draft would have excluded revenue-sharing payments, administrative fees and marketing payments from the insurance sales commission definition.

"Instead, the final amendment covers the receipt of 'reasonable compensation,' both cash and non-cash from any and all sources, subject to compliance with the exemption's Impartial Conduct Standards and other applicable conditions," the team says.

What it means: If the new Labor Department approach survives court challenges, skepticism in Congress and the impact of the November presidential elections, law firms could find ways to help agents, brokers and advisors live with it.

The exemption: A fiduciary standard requires the people and companies subject to it to put the clients' interests first and to avoid and disclose conflicts of interest.

The Labor Department's updated definition of fiduciary in its new retirement security rule applies to people and firms that help retirement savers roll assets from 401(k) plan accounts and individual retirement accounts into other arrangements.

Independent insurance producers can use a separate document, an updated version of Prohibited Transaction Exemption 84-24, to get paid for selling fixed annuities and other insurance products with an investment component that are not regulated as securities, such as universal life insurance.

Other people and companies that help retirement savers with rollovers must use a separate, less flexible exemption, Prohibited Transaction Exemption 2020-02, which requires an insurance company or other organization to assume responsibility for fiduciary rule compliance.

PTE 84-24 details: The Groom Law team notes that, like the draft of the PTE 84-24 update, the final version narrows the range of people able to use the exemption.

Only recommendations of products other than securities are covered. That means that independent producers who sell traditional variable universal life insurance, traditional variable annuities and registered index-linked annuities will have to use the PTE 2020-02 exemption, which is less flexible.

Another limitation is that PTE 84-24 is available only to producers who are not employees or statutory employees of an insurance company.

"But the removal of the proposal's limitations on covered compensation would appear, at least initially, to make the final version far more viable than had been proposed," the Groom Law team says.

Regulation Best Interest: Investment firms that acknowledge that they are fiduciaries will have a year after Sept. 23 to implement the new investment advice fiduciary requirements.

David Olstein and Laura Pappas, lawyers at Hogan Lovells, suggest in a separate commentary that one concern is any conflicts between the Labor Department's Impartial Conduct Standards and the conduct standards in the U.S. Securities and Exchange Commission's Regulation Best and the National Association of Insurance Commissioners' annuity sales standards.

"Compliance structures developed for those regimes may need to be revised to address requirements specific to the impartial conduct standards," Olstein and Pappas write.

The more the Labor standards conflict with the SEC Reg BI standards, the more burdensome the one-year implementation timeline will be.

Misconduct: An employee benefits and executive compensation team at Sidley notes that, unlike the old version of PTE 84-24, the new version includes a provision that keeps people convicted of crimes or other misconduct from using the exemption.

The provision applies to specified crimes and misconduct that occur on or after Sept. 23, the Sidley team says.

Credit: Chris Nicholls/ALM; Adobe Stock