The proposed standard could turn IMOs, FMOs and BGAs into the
Impartial Conduct Standards cops.
The Employee Benefits Security Administration
(EBSA) has unveiled a new sales standard proposal that could affect investment
advice fiduciaries that help retirement savers roll cash from retirement plans
into individual retirement accounts (IRAs).
EBSA is an arm of the U.S. Department of Labor
(DOL), and the new draft is likely to set off a new wave of battles over who
should regulate annuity sellers, and how.
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DOL Secretary Eugene Scalia said in a comment
in the proposal release announcement that the EBSA approach would give
individuals the information they need to make good decisions.
The proposal “would give Americans more
choices for investment advice arrangements, while protecting the retirement
savings of American workers,” Scalia said.
EBSA is preparing to publish the proposal in
the Federal Register and has posted a preliminary version on its own website.
Here are seven things to know about the new
EBSA proposal, for financial professionals involved with annuities.
1. The new proposal is
part of a long-running financial services sales standard fight.
The proposed standard is part of a
long-running battle over how federal and state regulators should handle
annuities, and between some fee-based advisors, who want anyone offering
financial advice to abide by very strict standards, to avoid any hint of bias,
and many commission-based financial representatives, who say that many
consumers prefer to work with financial professionals without having to pay a
fee.
The Employee Retirement Income Security Act of
1974 (ERISA) includes a provision requiring people involved with retirement
plan assets to act as “fiduciaries,” and to make decisions in the best interest
of the plan participants.
Critics argued that a “five-part test” used
to apply the ERISA fiduciary provision was too vague and let
commission-based con artists loot consumers’ retirement accounts.
When Barack Obama was president, the Labor
Department completed work on a fiduciary rule regulation that would have imposed
very strict, detailed requirements on indexed annuity sellers.
When Donald Trump became president, the
department stopped defending the Obama-era approach to financial services sales
standards, and the Obama-era DOL approach died in court.
The U.S. Securities and Exchange Commission is
now implementing an alternative to the doomed DOL standard, Regulation Best
Interest, or Reg BI, which imposes new disclosure requirements but continues to
allow companies to pay commissions.
Many financial planner groups, investor groups
and consumer groups have opposed the Reg BI-based approach, arguing that it
does too little to curb aggressive, commission-driven sales practices.
The National Association of Insurance
Commissioners (NAIC) has completed work on an annuity sales standards model
that’s meant to be compatible with Reg BI. New York state has openly opposed
the NAIC model. California has indicated concerns about the model but voted for
adoption. Iowa and Arizona have both adopted the NAIC model.
The new DOL proposal would appear to be
compatible with both Reg BI and the NAIC model.
2. Comments will be
due 30 days after the official Federal Register publication date.
Preston Rutledge, the previous EBSA head, left
the agency at the end of May.
Jeanne Klinefelter Wilson is now the acting
assistant secretary of Labor who’s in charge of EBSA. Before she began working
for EBSA, in 2017, she was a benefits lawyer at Continental Airlines and Waste
Management and a benefits lawyer at Groom Law Group.
EBSA lists Susan Wilker and Erin Hesse as the
proposal contact people.
3. The proposal is
actually a “prohibited transaction exemption,” or PTE.
The proposal would allow transactions that
normally would be prohibited by ERISA and by the Internal Revenue Code of 1986
(IRC).
EBSA reports an impact analysis that the PTE
could apply to 3,764 broker-dealers, 12,940 investment advisors who are
registered with the SEC, 16,939 advisors who are registered with state
regulators, and 386 insurers that write at least some annuities.
4. The proposal is
based on an ‘Impartial Conduct Standards’ framework.
“Impartial Conduct Standards” include a
standard requiring a retirement fiduciary to act in the best interest of the
retirement saver; a reasonable compensation standard; and a requirement for
people subject to the requirements to make no materially misleading statements.
5. EBSA says the
exemption would apply to retirement plan-to-IRA rollovers.
EBSA says the PTE would be available to
“registered investment advisers, broker-dealers, banks, and insurance companies
… and their individual employees, agents, and representatives (investment
professionals) that provide fiduciary investment advice to retirement
Investors.
The proposal defines “retirement plan
investors” as participants in and beneficiaries of 401(k) plans and other
similar types of retirement plans, IRA owners, and retirement plan and IRA
fiduciaries.
The proposal would apply to prohibited
transactions arising as a result of investment advice to roll over assets from
a retirement plan to an individual retirement account (IRA).
Officials note that retirement savers may have
rolled over about $2.4 trillion in plan assets into IRAs from 2016 through this
year.
The exemption would also let financial
institutions, such as life insurers, engage in principal transactions with
plans ad IRAs in which the financial institution buys or sells certain
investments from its own account.
Arrangements in which all advice was provided
by a computer model might not be eligible for relief under the exemption, but
EBSA is asking for comments on that point.
The exemption would also not apply to a
retirement plan’s “named fiduciary,” such as a plan administrator, unless the
sponsor chose the same company to provide investment advice.
6. EBSA says agents
could still collect sales commissions, and many other forms of revenue.
Under the proposal, insurers and agents could
get commissions, trailing commissions, sales loads, markups, markdowns, and
revenue-sharing payments from investment providers or third providers,
7. The proposal could
make various types of annuity distributors more important.
To qualify for the exemption, agents and life
insurers would have to provide advice in accord with the Impartial Conduct
Standards.
Life insurers would have to acknowledge their
fiduciary status and their agents’ fiduciary status, in writing, when they and
their agents were working with investors, and the life insurers would have to
“adopt policies and procedures prudently designed to ensure compliance with the
Impartial Conduct Standards and conduct a retrospective review of compliance.”
Life insurers with agents or brokers who work
for multiple companies could supervise the producers, or they could have other
organizations, such as independent marketing organizations (IMOs), field
marketing organizations (FMOs) or brokerage general agencies (BGAs).
EBSA notes that IMOs, FMOS and BGAs that are
investment advice fiduciaries can “apply for relief for the receipt of
compensation in connection with the provision of investment advice on the same
conditions as apply to the financial institutions covered by the proposed
exemption,” according to the proposal text.
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