Page 25 - Investment Advisor - December 2023

Similarly, agents who are more close- The Retirement Security Rule draft ties, and the SEC typically sets sales
ly affiliated with insurers, broker-deal- regulations, via the imposition of a rules for securities.
ers or investment companies, and who fiduciary standard of care on indepen- • It would affect non-variable indexed
operate under a second set of Labor dent agents, would require agents to annuities, because those are not classi-
Department regulations, PTE 2020-02, put retirement savers’ interests first. fied as securities. It also appears to apply
would have to provide a notice acknowl- The standard-of-care requirements to an independent insurance producer
edging that they would receive com- might complicate agents’ lives and cre- offering any annuity or insurance con-
missions or other transaction-based ate problems for commission-based tract that’s not classified as a security to
compensation and offering to provide compensation arrangements, but the a retirement investor.
specific compensation information, for PTE 84-24 draft makes it clear that the • The department is asking for
free, upon request. Labor Department wants to advice about whether and how to apply
Insurers and other finan- let the agents continue to the new regulation update to “other
cial institutions could not earn commissions. insurance products” not regulated by
use any sales contests, quo- One part of the PTE 84-24 the SEC.
tas, travel incentives or other annuity agent compensation • The regulation update would apply
non-cash compensation that proposal is an estimate of how both to annuities and to “employee wel-
might cause the indepen- many independent produc- fare benefit plans with an investment
dent producers using PTE 84-24 or the ers might be affected. Labor Department component,” such as health savings
investment professionals subject to PTE analysts estimate that only 1,577 insur- account programs, according to a foot-
2020-02 to have any incentive other ance and brokers use the exemption to note in the preamble.
than meeting the client’s needs. earn commissions for selling annuities. • The department notes that the
Officials at the Employee Benefits Here are other possible impacts of NAIC expects life insurers to regulate
Security Administration, the arm of the proposal: the independent agents who sell their
the Labor Department that oversees • It likely would not affect variable products, without overseeing sales of
employee benefits and administration annuity sellers, because federal law products from other companies, and
of the Employee Retirement Income classifies variable annuities as securi- says that approach seems to make sense.
Security Act of 1974, were listening
when insurance groups told them that
commission-based transactions are lawsuit risk a saver, if you spend your whole life
better than fee-based transactions for accumulating savings and you’re going
some clients. The Labor Department’s to someone for advice, and
“Certainly, in many cases, it is in the new fiduciary rule will you’re paying them for that
retirement investor’s best interest to face a lawsuit, according to advice, you’re expecting that
receive advice from investment profes- Ben Harris, director of the the advice they give you is
sionals that are compensated through Retirement Security Project in your own best interest.
commissions incurred on a transactional at Brookings in Washington. And this is a really impor-
basis, rather than as part of an ongo- “I think it’s virtually sure tant decision. I mean, it’s lit-
ing fee-based relationship (for example, that you’ll see a lawsuit filed against it,” erally a lifetime of saving that’s on the
pursuant to an advisory relationship said Harris, who previously served as line here.”
subject to a recurring charge based on assistant secretary for economic policy At the time, Harris continued, “I
assets under management),” EBSA and chief economist at the Treasury, felt like the academic evidence and
officials wrote in the preamble, or during a recent Brookings podcast. the projections suggesting that people
official introduction, to the proposed The suit, Harris said, will likely be would drop out of the market, that
update to PTE 2020-02. based on the industry’s claim that the advisors would drop out of the market
“In such cases, the fact that the rule is “overly stringent, and what this owing to the fiduciary rule in 2016
investment professional received a means is that advisors will drop out of probably wasn’t all that well-founded
commission for their services is not the market,” a similar claim that indus- on the evidence.”
inconsistent with the principles set try was making in 2016, when the first It’s true, however, “that some com-
forth herein,” officials said. “Conversely, DOL fiduciary rule was floated. (It was missions might go down or they’d have
a recommendation to enter into a fee- thrown out in court in 2018.) to be paid differently, but I didn’t feel
based arrangement may, in certain Harris stated that he didn’t find the like there would be this overwhelm-
cases, be inconsistent with the Best industry’s argument “terribly compel- ing dearth of investment advice in the
Interest standard.” ling at the time, in part because, as market,” Harris said.

December 2023 Investment AdvIsor 23