Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers,…

Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters

SUMMARY: This document amends and partially revokes Prohibited Transaction Exemption (PTE) 84-24, an exemption from certain prohibited transaction provisions of the Employee Retirement Income Security Act of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code). The ERISA and Code provisions at issue generally prohibit fiduciaries with respect to employee benefit plans and individual retirement accounts (IRAs) from engaging in self-dealing in connection with transactions involving these plans and IRAs. Non-fiduciary service providers also may not enter into certain transactions with plans and IRAs without an exemption. The amended exemption allows fiduciaries and other service providers to receive compensation when plans and IRAs purchase insurance contracts, "Fixed Rate Annuity Contracts," as defined in the exemption, securities of investment companies registered under the Investment Company Act of 1940, as well as certain related transactions. The amendments increase the safeguards of the exemption. This document also contains the revocation of the exemption as it applies to plan and IRA purchases of annuity contracts that do not satisfy the definition of a Fixed Rate Annuity Contract, and the revocation of the exemption as it applies to IRA purchases of investment company securities. The amendments and revocations affect participants and beneficiaries of plans, IRA owners, and certain fiduciaries and service providers of plans and IRAs.

DATES: Issuance date: This amendment and partial revocation is issued June 7, 2016.

Applicability date: This amendment and partial revocation is applicable to transactions occurring on or after April 10, 2017. For further information, see Applicability Date, below.

FOR FURTHER INFORMATION CONTACT: Brian Shiker or Brian Mica, Office of Exemption Determinations, Employee Benefits Security Administration, U.S. Department of Labor, 200 Constitution Avenue NW., Suite 400, Washington, DC 20210, (202) 693-8824 (not a toll-free number).

SUPPLEMENTARY INFORMATION: The Department is amending PTE 84-24 /1/ on its own motion, pursuant to ERISA section 408(a) and Code section 4975(c)(2), and in accordance with the procedures set forth in 29 CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)).

FOOTNOTE 1 PTE 84-24, 49 FR 13208 (Apr. 3, 1984), as corrected, 49 FR 24819 (June 15, 1984), as amended, 71 FR 5887 (Feb. 3, 2006). END FOOTNOTE

Executive Summary

Purpose of Regulatory Action

The Department grants this amendment to PTE 84-24 in connection with its publication today, elsewhere in this issue of the Federal Register , of a final regulation defining who is a "fiduciary" of an employee benefit plan under ERISA as a result of giving investment advice to a plan or its participants or beneficiaries (Regulation). The Regulation also applies to the definition of a "fiduciary" of a plan (including an IRA) under the Code. The Regulation amends a prior regulation, dating to 1975, specifying when a person is a "fiduciary" under ERISA and the Code by reason of the provision of investment advice for a fee or other compensation regarding assets of a plan or IRA. The Regulation takes into account the advent of 401(k) plans and IRAs, the dramatic increase in rollovers, and other developments that have transformed the retirement plan landscape and the associated investment market over the four decades since the existing regulation was issued. In light of the extensive changes in retirement investment practices and relationships, the Regulation updates existing rules to distinguish more appropriately between the sorts of advice relationships that should be treated as fiduciary in nature and those that should not.

PTE 84-24 is an exemption originally granted in 1977, and amended several times over the years. It historically provided relief for certain parties to receive commissions when plans and IRAs purchased recommended insurance and annuity contracts and investment company securities (e.g., mutual fund shares). In connection with the adoption of the Regulation, PTE 84-24 is amended to increase the safeguards of the exemption and partially revoked in light of alternative exemptive relief finalized today. As amended, the exemption generally permits certain investment advice fiduciaries and other service providers to receive commissions in connection with the purchase of insurance contracts and Fixed Rate Annuity Contracts by plans and IRAs, as well as the purchase of investment company securities by plans. A Fixed Rate Annuity Contract is a fixed annuity contract issued by an insurance company that is either an immediate annuity contract or a deferred annuity contract that (i) satisfies applicable state standard nonforfeiture laws at the time of issue, or (ii) in the case of a group fixed annuity, guarantees return of principal net of reasonable compensation and provides a guaranteed declared minimum interest rate in accordance with the rates specified in the standard nonforfeiture laws in that state that are applicable to individual annuities; in either case, the benefits of which do not vary, in part or in whole, based on the investment experience of a separate account or accounts maintained by the insurer or the investment experience of an index or investment model. A Fixed Rate Annuity Contract does not include a variable annuity or an indexed annuity or similar annuity. Relief for compensation received in connection with purchases of annuity contracts that are not Fixed Rate Annuity Contracts by plans and IRAs, and compensation received in connection with purchases of investment company securities by IRAs, is revoked.

This amendment to and partial revocation of PTE 84-24 is part of the Department's regulatory initiative to mitigate the effects of harmful conflicts of interest associated with fiduciary investment advice. In the absence of an exemption, ERISA and the Code generally prohibit fiduciaries from using their authority to affect or increase their own compensation. A new exemption for receipt of compensation by fiduciaries that provide investment advice to IRAs, plan participants and beneficiaries, and certain plan fiduciaries, is adopted elsewhere in this issue of the Federal Register , in the "Best Interest Contract Exemption." That exemption provides relief for a broader range of transactions and compensation practices, including transactions involving annuity contracts that are not Fixed Rate Annuity Contracts, such as variable and indexed annuities. The Best Interest Contract Exemption contains important safeguards which address the conflicts of interest associated with investment recommendations in the more complex financial marketplace that has developed since PTE 84-24 was granted.

ERISA section 408(a) specifically authorizes the Secretary of Labor to grant and amend administrative exemptions from ERISA's prohibited transaction provisions. /2/ Regulations at 29 CFR 2570.30 to 2570.52 describe the procedures for applying for an administrative exemption. In amending this exemption, the Department has determined that the amended exemption is administratively feasible, in the interests of plans and their participants and beneficiaries and IRA owners, and protective of the rights of participants and beneficiaries of plans and IRA owners.

FOOTNOTE 2 Code section 4975(c)(2) authorizes the Secretary of the Treasury to grant exemptions from the parallel prohibited transaction provisions of the Code. Reorganization Plan No. 4 of 1978 (5 U.S.C. app. at 214 (2000)) ("Reorganization Plan") generally transferred the authority of the Secretary of the Treasury to grant administrative exemptions under Code section 4975 to the Secretary of Labor. Specifically, section 102(a) of the Reorganization Plan provides the DOL with "all authority" for "regulations, rulings, opinions, and exemptions under section 4975 [of the Code]" subject to certain exceptions not relevant here. Reorganization Plan section 102. In President Carter's message to Congress regarding the Reorganization Plan, he made explicitly clear that as a result of the plan, "Labor will have statutory authority for fiduciary obligations. . . . Labor will be responsible for overseeing fiduciary conduct under these provisions." Reorganization Plan, Message of the President. This amended exemption provides relief from the indicated prohibited transaction provisions of both ERISA and the Code. END FOOTNOTE

Summary of the Major Provisions

PTE 84-24, as amended, provides an exemption for certain prohibited transactions that occur when investment advice fiduciaries and other service providers receive compensation for their recommendation that plans or IRAs purchase "Fixed Rate Annuity Contracts" as defined in the exemption, and insurance contracts. IRAs are defined in the exemption to include other plans described in Code section 4975(e)(1)(B)-(F), such as Archer MSAs, Health Savings Accounts (HSAs), and Coverdell education savings accounts. Relief is also provided for certain prohibited transactions that occur when investment advice fiduciaries and other service providers receive compensation as a result of recommendations that plans purchase investment company securities. The exemption permits insurance agents, insurance brokers, pension consultants and investment company principal underwriters that are parties in interest or fiduciaries with respect to plans or IRAs, as applicable, to effect these purchases and receive a commission on them. The exemption is also available for the prohibited transaction that occurs when an insurance company selling a Fixed Rate Annuity Contract or insurance contract is a party in interest or disqualified person with respect to the plan or IRA.

As amended, the exemption requires fiduciaries engaging in these transactions to adhere to certain "Impartial Conduct Standards," including acting in the best interest of the plans and IRAs when providing advice. The amendment also more specifically defines the types of payments that are permitted under the exemption and revises the disclosure and recordkeeping requirements of the exemption.

--This is a summary of a Federal Register article originally published on the page number listed below--

Adoption of amendment to and partial revocation of PTE 84-24.

CFR Part: "29 CFR Part 2550"

Citation: "81 FR 21147"

Document Number: "ZRIN 1210-ZA25"

Federal Register Page Number: "21147"

"Rules and Regulations"