Questions On DOL Rule Focus On Preserving Annuity Business

By Cyril Tuohy

U.S. Department of Labor Secretary Thomas E. Perez this week suggested he was ready to work with the financial advisory industry to improve proposed conflict of interest rules. But he left no doubt that his agency was serious about pushing through tougher rules.

For sellers of fixed annuities, a sticking point in the DOL proposal surrounds the Prohibited Transaction Exemption 84-24, also known as PTE 84-24, which has traditionally provided agents with relief from compensation restrictions.

DOL has proposed to treat fiduciary transactions involving ERISA plans and IRAs differently, according to the DOL’s published proposal.

Employee Retirement Income Security Act (ERISA) plan fiduciaries remain eligible for relief under the 84-24 exemption with respect to transactions involving “all insurance and annuity contracts and mutual funds shares and the receipt of commissions allowable under that exemption.”

Investment advice fiduciaries to individual retirement accounts (IRAs) could still receive commissions for transactions involving insurance and annuity contracts, but IRA fiduciaries would be required to comply with standards in the DOL’s Best Interest Contract Exemption (BICE).

In other words, under the proposal, 84-24 will no longer be available for variable annuity or mutual fund sales to IRAs. Advisors selling those products to IRA owners would have to rely on the more onerous best interest contract exemptions.

But if those same products are sold to plans, 84-24 still applies.

PTE 84-24 “creates a convoluted compliance structure under which annuities transaction are divided between securities and non-securities products, and by the type of investor involved in the transaction,” National Association of Insurance and Financial Advisors (NAIFA) President Juli Y. McNeely wrote in comment letters delivered to the DOL last week.

“It is not clear why the Department feels that some products for some investors should be split off and handled under a separate compliance scheme,” McNeely also wrote.

For transactions covered under 84-24, the DOL proposal appears to have limited compensation relief to agents, brokers and principal underwriters to insurance commission and mutual fund commissions. In addition, the proposal excludes revenue sharing, administrative fees, marketing payments and payments for source other than insurance companies, according to NAIFA’s legislative analysis.

“The Department’s justification for such restrictions on compensation relief under 84-24 is unclear,” McNeely wrote.

The DOL says these kinds of payments are why new conflict of interest rules are necessary to remove the temptation of advisors to “steer” clients toward products for which there’s a financial incentive to sell.

Regulators, President Barack Obama, consumer watchdogs and fiduciary-based financial advisors and planners back the DOL proposal. They say the need for unvarnished retirement advice has never been greater as tens of millions of boomers ride off into retirement on a gradually building wave of defined contribution plans.

Industry groups representing insurance agents, broker/dealers, life insurers and mutual funds oppose the proposal on the grounds that it will restrict retirement choices for small businesses and individuals. Opponents have called for major modifications to the DOL proposal, with some groups urging that it be scrapped entirely.

“It’s just too difficult to execute in practice,” Judi Carsrud, a legislative analyst for NAIFA, said in an interview Friday with InsuranceNewsNet.

The public comment period closed this week, after more than two months. The DOL has received tens of thousands of individual comments and petitions in favor of and against the proposal, which was issued in April.

At the National Association for Fixed Annuities, executives also say they want clarification with regard to PTE 84-24 and its definition of acting in the best interest of an IRA plan “without regard to the financial or other interest of the fiduciary, any affiliate or other party.”

Annuity industry experts say leaving in the “without regard” clause is tantamount to economic suicide for annuity distributors.

Insurance agents and life and annuity carriers all have a financial interest in making a fixed annuity sale. Consumers understand they are paying an agent and (most likely) a carrier as a way for the insurance company and its distributor to stay in business.

Lacking further explanation clarity, “it is conceivable that the payment of any commission would create — even with proper disclosure — a material conflict of interest under the proposed definition,” NAFA Executive Director Charles “Chip” Anderson, wrote in comments to the DOL last week.

“Their definition would require you to disregard the financial advisor’s own legitimate business interest,” Lee Covington, senior vice president and general counsel of the Insured Retirement Institute, said in a telephone interview.

“We don’t see how you can sell a proprietary product or even a commission based product with that language there,” he said.

DOL’s best interest contract exemption calls for advisors and the company he or she represents to meet “fundamental obligations of fair dealing and fiduciary conduct.”

Regulators want advisors to dispense advice “that is in the customer's best interest; avoid misleading statements; receive no more than reasonable compensation; and comply with applicable federal and state laws governing advice.”

But “reasonable compensation” is, literally, a loaded phrase in the lexicon of the distribution chain and NAFA wants the DOL to clarify “reasonable compensation,” which appears in Section III of the DOL’s 84-24 PTE proposal.

DOL insists the combined total of all fees, commissions and other financial considerations received by agents and advisors not be in excess of “reasonable compensation,” but that should be “fact-specific” to the agent writing the business, Anderson wrote.

Agents have different arrangements with carriers as compensation should be based on “product specific commission arrangements,” from carriers or marketing companies that insurance agents are authorized to represent at the time of the sale, Anderson wrote.

Catherine J. Weatherford, president and CEO of the Insured Retirement Institute, said the “reasonable compensation” conditions not only fail to take into account the costs of annuity products’ guaranteed features, but also unfairly disadvantage proprietary products.

Advisors offering nonproprietary products would be required to test only the “reasonableness of the amounts” the agent and the carrier or firm he or she represents receives under the best interest contract’s exemption.

But advisors offering proprietary products for the same price and for the same level of services, total compensation would have to include amounts paid to the affiliated annuity issuer and amounts received by the advisor and the institution he or she represents, “making the reasonable compensation condition much more difficult to satisfy despite the fact that the actual amount of compensation paid in these two scenarios would be the same,” Weatherford wrote.

Industry officials will have the opportunity to make their voices heard during a series of public hearings beginning August 10.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].