After the furious amount of writing about the Department of Labor’s Fiduciary Rule over the last several months, we recently found ourselves in a lull period following the temporarily revised rule and implementation date of June 10, 2017. The current and provisional status of the Best Interest Contract Exemption (BICE) and Prohibited Transaction Exemption 84-24 (PTE 84-24) are still being discussed and debated, despite the lull. Further, the FULL implementation on January 1, 2018 remains a reality while there are still a number of questions that NEED to be answered by the DOL.
There is a bit of reassurance to be found in the DOL’s Request for Information (RFI) published on July 6th. They’re asking the right questions, the questions we’ve all been wondering aloud about since first hearing of the rule.
As currently written, one of the biggest issues affecting independent insurance agents is the requirement to use a BICE effective January 1, 2018 to transact qualified Fixed Indexed Annuity (FIA) business, or utilize qualified funds to purchase life insurance. This move away from the PTE 84-24 is problematic because it requires a financial institution to supervise the sale. When drafting the rule, the DOL most likely expected insurance carriers carry this burden, however as we’ve seen, the majority of carriers want no part of that. Without finding an intermediary solution, independent insurance agents will be barred from selling fixed index annuities and life insurance using qualified funds.
The DOL addresses this issue in Question 17 of the RFI:
If the Department provided an exemption for insurance intermediaries to serve as Financial Institutions under the BIC Exemption, would this facilitate advice regarding all types of annuities? Would it facilitate advice to expand the scope of PTE 84-24 to cover all types of annuities after the end of the transition period on January 1, 2018? What are the relative advantages and disadvantages of these two exemption approaches (i.e., expanding the definition of Financial Institution or expanding the types of annuities covered under PTE 84-24)? To what extent would the ongoing availability of PTE 84-24 for specified annuity products, such as fixed indexed annuities, give these products a competitive advantage vis-à-vis other products covered only by the BIC Exemption, such as mutual fund shares?
Question 17 boils down to two alternatives. First, should insurance intermediaries (e.g. IMOs and BGAs) be allowed to serve as “financial institutions”, therefore allowing independent insurance agents to use a BICE. This option puts a load of liability on the shoulders of these intermediaries and requires a great deal of regulation and oversight. For those reasons, this option may be attractive to the DOL. Second, should the DOL continue to allow fixed index annuities (and fixed rate and variable annuities) to be included under the PTE 84-24 exemption? This direction would not require financial institutions to supervise independent insurance agents but would be more restrictive on compensation including greater disclosure.
There are pros and cons to both of these solutions, and there is no indication at this point how this will be resolved. We now know the DOL is considering the plight of the independent insurance agents that currently use qualified funds in the financial planning process. The DOL is asking the right questions. However this plays out, I guarantee Zenith Marketing Group will have a solution in place to continue the partnership we have enjoyed with the independent insurance agents we work with. We just need the DOL to answer Question 17 first before we tell you how.