On April 7th of 2017, just seven days after the new Secretary of the Department of Labor (DOL) Alexander Acosta was confirmed, the department responded to President Trump’s executive memorandum to conduct a detailed analysis of the department’s Fiduciary Rule. The response resulted in the delaying of the applicability date from the previously scheduled April 10th date until June 9th. The department deemed the delay as the “Final Extension” making it clear that unless they are forced by some other means to again delay or withdraw the rule, they have no intention of further modification. Contained in the delay were revisions in the language regarding Best Interest Contract Exemption (BIC-E) and Prohibited Transaction Exemption 84-24 (PTE 84-24) to be applied during a transition period to expire on January 1st 2018, which temporarily allows for a less burdensome application of the DOL Fiduciary Rule. While there are a great many aspects of the rule that pertain to varying products and distribution sources, here we will only be addressing Fixed Deferred Annuities, Immediate Annuities, Deferred Income Annuities, and Fixed Indexed Annuities.
By way of background, in the original draft of the DOL Fiduciary Rule, Fixed (SPDA), Immediate (SPIA), Deferred Income (DIA), as well as Fixed Indexed (FIA) annuity products that were purchased using Qualified assets all fell under PTE 84-24, which primarily required compliance with what is known as the Impartial Conduct Standard. In the final version released in April 2016, Fixed Indexed Annuities were moved from PTE 84-24 and placed under BIC-E which requires that a Financial Institution be party to (read: liable for) the sale of FIAs. Under the current transition rules, FIAs are once again placed under the PTE 84-24 requirements. While the ability to temporarily transact the sale of FIAs without the need for involvement of a Financial Institution may ease the facilitation of a sale, it does not eliminate the liability of the agent/producer; in fact it might increase it. As noted above, the Impartial Conduct Standards still apply which require the following:
- Provide advice in the client’s best interest
- Avoid misleading statements
- Receive only reasonable compensation
Most would reasonably agree that the majority of FIA and other Fixed Annuity sales are transacted in the client’s best interest. Certainly the very low number of complaints reported to the National Association of Insurance Commissioners (NAIC) would bear this out. As such, it is also reasonable to assume that misleading statements are far from the norm. But, how does one determine “reasonable” when considering compensation. Well be aware that the DOL has provided a non-answer. First it is important to note that it is up to the person receiving the compensation to demonstrate that what is received is reasonable. Secondly, the DOL has indicated that it is up to the producing and distribution segments of the industry to figure it out, which means the insurance companies and other providers of financial products as well as Financial Institutions. And then, the ultimate arbiter of reasonableness will or can be determined in the courts. It is important to remember that the intent of the DOL Fiduciary Rule is to eliminate commissions and any other compensation as a detractor from the consideration of the client’s best interest. Were it not for the exemptions provided by PTE 84-24 and BIC-E, commissions would be eliminated altogether and compensation for advice would only be available via a fee-based structure.
While the temporarily less stringent requirements on the sale of FIAs in particular is significant, it is still the position of Zenith Marketing Group that we as a company firmly oppose the Department of Labor’s Fiduciary Rule. Not because of its stated intent of doing what is in the best interest of a client, but because of the Private Right to Action afforded to any individual whose attorney can convince a jury that the plaintiff should be an individual class-action- lottery-winner at the expense of an advisor and/or Financial Institution.
There have been and will be a number of varying actions taken by individual insurance companies prior to June 9th. Some will likely require an additional form or acknowledgement of compliance with the Impartial Conduct Standards. Others may provide notifications to producers requiring only negative consent. As the policies and procedures of the carriers are announced, we here at Zenith Marketing Group will make every effort to summarize the requirement for compliance and share them with you. For producers who are affiliated with a Broker/Dealer or Registered Investment Advisory firm, please understand that your firm’s policies and procedures should be followed as the firm instructs and we wholly welcome the opportunity to work with your firm to insure compliance. Lastly, there is one major element that is sure to be necessary in the very near future- Document, Document, Document every aspect of your conversations with your clients. In closing, I assure you, Zenith Marketing Group, Inc. is working for you and with you during the transition period…and after.