How captive and independent agents are affected by the DOL rule

By John Hilton

The new Department of Labor fiduciary proposal is nearly 500 pages and has a lot of details. But the biggest fight is going to come down to how agents are regulated – and that goes for both independent and captive agents.

Should the new fiduciary proposal become law, life will change for both of the two types of agents, said Fred Reish and Brad Campbell, partners at the law firm Faegre Drinker Biddle & Reath.

The new rules would clear up a lot of ambiguity, although not in a welcome way for those impacted.

“Their current guidance is not clear,” Campbell said. “I can be talking to the same participants situated in much the same situation about a rollover. And in one case, under DOL's guidance, I'm definitely a fiduciary. And in another case, I'm not. There's no easy way for a financial institution to discern which of those is the case."

The DOL released its latest fiduciary rule attempt on Halloween, with President Joe Biden joining for a press conference to denounce "junk fees." The rule was widely criticized by industry trade groups who claim the extension of fiduciary duty to virtually anyone recommending an annuity would have a chilling effect on advice to middle-market savers.

Public comments are being taken until Jan. 2, although trade groups have asked for an extension of that deadline.

Fiduciary rule: A pair of exemptions

Big changes in the DOL fiduciary rule proposal deal with two exemptions, which allow annuity sellers to collect a commission: Prohibited Transaction Exemption 84-24, which dates to 1977, and PTE 2020-02, an alternative created by the Trump administration.

Amended several times over the years, PTE 84-24 allows producers to receive commissions when retirement plans and IRAs purchase insurance and annuity contracts.

Under PTE 2020-02, if an "investment professional” gives fiduciary advice to a retirement investor, the “financial institution” is also considered a fiduciary. There are strict requirements with this exemption.

Along them, the producer must adhere to “Impartial Conduct Standards.” They include: give advice that is in the best interest of the participant, the insurance company and the agent receive no more than reasonable compensation, and make no materially misleading statements.

Here's how the proposed exemption changes would affect both captive – agents who work for only one insurance company – and independent agents:

Captive agents

The DOL is trying to push more annuity sellers into PTE 2020-02, analysts say, and it impact captive agents. Broker-dealers and investment advisors are already complying with PTE 2020-02, Reish said during a Thursday webinar.

PTE 2020-02 "hasn't really been toughened up that much, unless you are a career or captive agent of an insurance company," he added. "Those folks were all under 84-24, and are today, but if these proposals become the rule, they're going to move all those statutory employees and regular employees who sell insurance over to 2020-02 and treat them like broker-dealers and investment advisors.”

A few reporting and disclosure requirements are all the significant changes to PTE 2020-02, Campbell said.

“Except for that narrow sliver of 84-24 that's still there, they've redirected every other non-discretionary recommendation from every other exemption all into 2020-02,” he added.

Independent agents

Independent agents used to relying on PTE 84-24 to get paid commissions are in for the biggest change, and this will be the biggest fight, Reish said. And it all comes down to compensation. In its bid to mitigate conflicts, the DOL is very narrowly restricting how independent agents can get paid, Campbell explained.

"The whole purpose of an independent agent is to be independent, therefore, they can't be controlled by that carrier to the same extent," he said. "But that also means that it's harder for us, DOL, to know that someone's watching their conflicts and properly mitigating them. So, instead of giving broader latitude in compensation, we're going to narrowly define what it is."

The only permissible compensation would be the upfront commission, the renewal fee, and any trailing fees, Campbell noted.

"No other form of compensation of any kind is permitted under the exemption," he said. "That means no marketing support payment [and] a whole variety of different incentives that are typically present in insurance-sales relationships."

The DOL push to extend fiduciary duty is achieving its goals in one respect. Many agencies and firms, mainly the bigger ones, established new policies and procedures in the months before the rules took effect, Reish noted.

“Everybody's in compliance for a year or two, or three, then it gets resolved one way or the other,” Reish said. “They have to get in compliance. Because if the DOL position is upheld by the courts, then you may have a whole heck of a lot of prohibited transactions if you weren't in compliance.”

InsuranceNewsNet Senior Editor John Hilton covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.