DOL: New Investment Advice Rule Does Not Include Right To Sue

By Steven A. Morelli

The Department of Labor’s newest guidance on its investment advice rule’s exemption emphasizes that the rule does not extend a private right to sue and other conditions set in the previous rulemaking that inspired industry objections.

“In marked contrast to the 2016 rulemaking, the new exemption does not impose contract or warranty requirements on the financial institutions or investment professionals responsible for compliance,” according to the guidance. “The exemption also does not expand retirement investors’ ability to enforce their rights in court or create any new legal claims beyond those in Title I of ERISA and the Code.”

That is one of the points the department made on enforcement. The DOL will be the entity ensuring that sellers meet the conditions to qualify for the Prohibited Transaction Exemption 2020-02.

“For IRAs and other non-Title I plans, the Department has interpretive authority to determine whether the exemption conditions have been satisfied and transmits information to the IRS for enforcement of the excise tax.”

PTE 2020-02 is part of the Trump administration investment advice rule that took effect Feb. 16. Beyond the exemption, the rule reinterprets the "five-part test" from 1975 to determine what constitutes investment advice. The Trump rule replaced the unpopular fiduciary rule put forth by the Obama administration.

Advisors have until Dec. 20 to come into full compliance with the new rule.

Although the new exemption covers insurance companies and agents, according to the guidance, PTE 84-24 is still the preferred route for insurance carriers, according to H.L. Vogl, director, advanced sales, at Crump Life Insurance Services. The new exemption would apply for “one-time” transactions and in the context of a broader relationship of providing advice on retirement investments.

“This is simply an additional way for persons who are categorized as “fiduciaries” under Section 4975 of the Tax Code to qualify to be paid a commission for selling products or services to qualified plan participants and individual retirement account owners,” Vogl wrote in InsuranceNewsNet. “No one is required to use this particular new PTE instead of preexisting ones.”

Three-Point Disclosure

The DOL has also clarified that PTE 84-24 covers sales to IRA owners and commissions paid to insurance intermediaries as well, Vogl said, as long as the client acknowledges a disclosure containing three points.

• The nature of any affiliation or relationship with the insurance company whose contract is being recommended, and any limitations on the products that can be recommended.
• The sales commission, expressed as a percentage of gross annual premium payments.
• A description of any charges, fees, discounts, penalties or adjustments under the contract.

The DOL guidance on PTE 2020-02 focuses on recommendations on rolling over assets from an employee benefit plan to an IRA, which would be considered fiduciary investment advice.

“The decision to roll over assets from a plan to an IRA is often the single most important financial decision a plan participant makes, involving a lifetime of retirement savings” according to the guidance’s FAQ.

The FAQ also reinforced that PTE 2020-02’s effective date was Feb. 16: “The Department considered whether to delay the exemption’s effective date, pursuant to the memorandum from Ronald A. Klain, Assistant to the President and Chief of Staff, entitled “Regulatory Freeze Pending Review,” and concluded that PTE 2020-02 should go into effect as scheduled.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at stevenamorelli@gmail.com.