Proposed Rule2023-23781
Proposed Amendment to Prohibited Transaction Exemption 84-24
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 3, 2023
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a notice of pendency before the Department of Labor (the Department) of a proposed amendment to 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 amendment would affect participants and beneficiaries of plans, Individual Retirement Account (IRA) owners, and certain fiduciaries of plans and IRAs.
Full Text
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<title>Federal Register, Volume 88 Issue 212 (Friday, November 3, 2023)</title>
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[Federal Register Volume 88, Number 212 (Friday, November 3, 2023)]
[Proposed Rules]
[Pages 76004-76032]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-23781]
[[Page 76004]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12060]
ZRIN 1210-ZA33
Proposed Amendment to Prohibited Transaction Exemption 84-24
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Notice of Proposed Amendment to Prohibited Transaction
Exemption 84-24.
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SUMMARY: This document contains a notice of pendency before the
Department of Labor (the Department) of a proposed amendment to
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 amendment would affect participants and beneficiaries of
plans, Individual Retirement Account (IRA) owners, and certain
fiduciaries of plans and IRAs.
DATES:
Public Comments. Comments are due on or before January 2, 2024.
Public Hearing. The Department anticipates holding a public hearing
approximately 45 days following the date of publication in the Federal
Register. Specific information regarding the date, location, and
submission of requests to testify will be published in a notice in the
Federal Register.
Applicability Date. The Department proposes to make the final
amendment effective 60 days after it is published in the Federal
Register.
ADDRESSES: All written comments concerning the proposed amendments
should be sent to the Employee Benefits Security Administration, Office
of Exemption Determinations, U.S. Department of Labor through the
Federal eRulemaking Portal and identified by Application No. D-12060.
Federal eRulemaking Portal: Visit <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
Follow the instructions for sending comments.
Docket: For access to the docket to read background documents and
comments, including the plain-language summary of the proposal required
by the Providing Accountability Through Transparency Act of 2023, or
comments, please go to the Federal eRulemaking Portal at <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
See SUPPLEMENTARY INFORMATION below for additional information
regarding comments.
FOR FURTHER INFORMATION CONTACT: Susan Wilker, (202) 693-8540 (not a
toll-free number), Office of Exemption Determinations, Employee
Benefits Security Administration, U.S. Department of Labor.
SUPPLEMENTARY INFORMATION:
Comment Instructions
Warning: All comments received will be included in the public
record without change and will be made available online at
<a href="http://regulations.gov">regulations.gov</a>. This includes any personal information provided,
unless the comment includes information claimed to be confidential or
information whose disclosure is restricted by statute. If you submit a
comment, EBSA recommends that you include your name and other contact
information, but DO NOT submit information that you consider to be
confidential, or otherwise protected (such as Social Security number or
an unlisted phone number), or confidential business information that
you do not want publicly disclosed. If EBSA cannot read your comment
due to technical difficulties and cannot contact you for clarification,
EBSA might not be able to consider your comment. The
<a href="http://www.regulations.gov">www.regulations.gov</a> website is an ``anonymous access'' system, which
means EBSA will not know your identity or contact information unless
you provide it. If you send an email directly to EBSA without going
through <a href="http://regulations.gov">regulations.gov</a>, your email address will be automatically
captured and included as part of the comment that is placed in the
public record and made available on the internet.
Background
As described elsewhere in this edition of the Federal Register, the
Department is proposing to amend the regulation defining when a person
renders ``investment advice for a fee or other compensation, direct or
indirect'' with respect to any moneys or other property of an employee
benefit plan, for purposes of the definition of a ``fiduciary'' in
section 3(21)(A)(ii) of ERISA and in section 4975(e)(3)(B) of the Code.
The Department also is proposing amendments to existing PTEs 75-1, 77-
4, 80-83, 83-1, 86-128, and 2020-02 elsewhere in this edition of the
Federal Register.
The Department is proposing to amend PTE 84-24 to address specific
issues that Insurers confront in complying with the current conditions
of PTE 2020-02 when distributing annuities through independent agents.
The ERISA and Code provisions at issue generally prohibit employee
benefit plan and IRA fiduciaries from engaging in self-dealing in
connection with transactions involving these plans and IRAs. Currently,
PTE 84-24 allows these fiduciaries to receive compensation when plans
and IRAs enter into certain insurance and mutual fund transactions that
the fiduciaries recommend, as well as certain related transactions. The
proposed amendment would provide exemptive relief to fiduciaries who
are Independent Producers that recommend annuities from an unaffiliated
Insurer to Retirement Investors on a commission or fee basis if certain
protective conditions are met.
The Department is proposing this amendment on its own motion
pursuant to its authority under ERISA section 408(a) and Code section
4975(c)(2) and in accordance with procedures set forth in 29 CFR part
2570, subpart B (76 FR 66637 (October 27, 2011)).\1\
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\1\ Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 1 (2018))
generally transferred the authority of the Secretary of the Treasury
to grant administrative exemptions under Code section 4975 to the
Secretary of Labor.
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Current PTE 84-24
Currently, under PTE 84-24, plans and IRAs may purchase insurance
or annuity contracts or investment company securities, and insurance
agents or brokers, pension consultants, and principal underwriters may
receive compensation as a result of these purchases.\2\ Originally
proposed in 1976,\3\ PTE 84-24 covers several transactions in
connection with the purchase of insurance and annuity contracts and the
purchase and sale of securities issued by an investment company.
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\2\ As defined in Section X(d), the term ``Individual Retirement
Account'' or ``IRA'' means any plan that is an account or annuity
described in Code section 4975(e)(1)(B) through (F), including an
Archer medical savings account, a health savings account, and a
Coverdell education savings account. While the Department uses the
term ``Retirement Investor'' throughout this document, the exemption
is not limited only to investment advice fiduciaries of employee
pension benefit plans and IRAs. Relief would be available for
investment advice fiduciaries of employee welfare benefit plans with
an investment component as well.
\3\ 41 FR 56760 (Dec. 29, 1976), finalized as PTE 77-9, 42 FR
32395 (June 24, 1977)
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PTE 2020-02
When the Department finalized PTE 2020-02 in December 2020, the
Department explained that insurance companies could rely on either PTE
2020-02 or PTE 84-24 regardless of whether they sell their products
through captive or independent agents. In the preamble to the final PTE
2020-02, the
[[Page 76005]]
Department stated that insurance companies working with independent
agents can satisfy the conditions of PTE 2020-02 related to the
required policies and procedures either by supervising independent
insurance agents or by contracting with insurance intermediaries to do
so.\4\ In April 2021, the Department provided further guidance in a set
of Frequently Asked Questions (FAQs) regarding compliance with the
exemption.\5\ Specifically, Question 18 of the FAQs provided that:
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\4\ ``Insurance company Financial Institutions can comply with
the new exemption by supervising independent insurance agents, or by
creating oversight and compliance systems through contracts with
insurance intermediaries. The Financial Institution and/or
intermediary would address incentives created with respect to
independent agents' recommendations of the Financial Institution's
insurance or annuity products.'' 85 FR 82798, 82835 (Dec. 18, 2020).
\5\ <a href="https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf</a>
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When an independent insurance agent recommends an annuity under
the exemption, the agent and the financial institution (e.g., the
insurance company) must satisfy the exemption's conditions,
including the fiduciary acknowledgement and the Impartial Conduct
Standards with respect to that transaction. In such cases, the
insurance company must ensure that it has adopted policies and
procedures to ensure compliance with the Impartial Conduct Standards
and to avoid incentives that place the firm's or agent's interests
ahead of the interests of retirement investors. While the
independent agent may recommend products issued by a variety of
insurance companies, PTE 2020-02 does not require insurance
companies to exercise supervisory responsibility with respect to the
practices of unrelated and unaffiliated insurance companies. When an
insurance company is the supervisory financial institution for
purposes of the exemption, its obligation is simply to ensure that
the insurer, its affiliates, and related parties meet the
exemption's terms with respect to the insurance company's annuity
which is the subject of the transaction.
Since issuing PTE 2020-02 and posting the FAQs on its website, the
Department has conferred with representatives of insurance companies
that distribute annuities through independent agents, regarding their
compliance with the conditions of PTE 2020-02. At the meetings, the
representatives almost universally asserted that the main compliance
challenge they face in complying with PTE 2020-02 is that they cannot
effectively exercise fiduciary authority over independent insurance
agents who do not work for any one insurance company and are not
obligated to recommend only one company's annuities. According to the
insurance company representatives, unlike a broker-dealer that can
readily control the products its representatives recommend and the
compensation they receive, insurance companies working with independent
agents have much less authority over the conduct and compensation of
independent agents. These insurance companies also face much greater
liability risk if they are required to provide a fiduciary
acknowledgement, because they do not have the necessary control over
the independent agents to manage the independent agent's product
offerings and do not know the full range of products the independent
agent is authorized to sell. Thus, despite the Department's compliance
guidance provided in the preamble to PTE 2020-02 and FAQ 18, these
parties represented to the Department that they prefer relying on
existing PTE 84-24.
While acknowledging these concerns, the Department continues to
believe that insurance companies can effectively exercise fiduciary
oversight with respect to independent agents' recommendations of their
own products under PTE 2020-02. PTE 2020-02 is a broad, flexible, and
principles-based approach that applies across different financial
sectors and business models and provides relief for multiple categories
of Financial Institutions and Investment Professionals, including
insurance companies selling their products through independent agents,
and it would continue to be so if the Department adopts the amendments
to PTE 2020-02 that it is proposing today. The Department is proposing
to amend PTE 84-24, however, to provide a narrowly tailored,
alternative exemption allowing independent insurance agents to receive
commissions from insurance companies with respect to annuity
recommendations.
As amended, PTE 84-24 would not require the insurance company to
provide a fiduciary acknowledgement, and the insurance company would
not be treated as a fiduciary merely because it exercised oversight
responsibilities over independent insurance agents under the
exemption.\6\ Instead, the proposed amendment would require the
independent agent that recommends the annuity to make the fiduciary
acknowledgement,\7\ and the insurance company selling its product
through the independent agent only would be required to exercise
supervisory authority over the independent agent's recommendation of
its own products. The proposed amended exemption would be limited to
commissions or fees as defined in the amendment, which would have to be
fully disclosed to the Retirement Investor.
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\6\ For purposes of this disclosure, and throughout the
exemption, the term fiduciary status is limited to fiduciary status
under Title I, the Code, or both. While this exemption and the SEC's
Regulation Best Interest both use the term ``best interest,'' the
Department retains interpretive authority with respect to
satisfaction of this exemption.
\7\ For purposes of this disclosure, and throughout the
exemption, the term fiduciary status is limited to fiduciary status
under Title I, the Code, or both.
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Overview of the Proposed Amendment to PTE 84-24
The Department is proposing to amend PTE 84-24 so that investment
advice fiduciaries would rely on a new section of PTE 84-24 for
independent insurance agents (called Independent Producers) selling
non-securities annuities or other insurance products not regulated by
the Securities and Exchange Commission (SEC) to Retirement Investors.
The proposed amendment would exclude investment advice fiduciaries from
the current relief in PTE 84-24 while proposing relief under a new
section of the exemption with specific conditions for independent
insurance agents providing investment advice. The Department's
objective in proposing this amendment is to provide a level playing
field for all investment advice fiduciaries.
To rely on the investment advice relief in this proposed amendment
to PTE 84-24, the Independent Producers would have to sell annuities of
two or more unrelated Insurers. Independent Producers that sell or
recommend investment products other than annuities, such as mutual
funds, stocks and bonds, and certificates of deposit must rely on PTE
2020-02 when receiving fees or other compensation in connection with
investment recommendations related to those products. The amended PTE
84-24 would provide relief from the prohibited transaction rules only
for the receipt of fully disclosed commissions or fees in connection
with annuity recommendations or other insurance products not regulated
by the SEC. In other respects, the proposed amendment to PTE 84-24 for
investment advice would provide very similar protections to Retirement
Investors as PTE 2020-02 and create a level playing field for all
investment advice provided to Retirement Investors regardless of the
investment products that are recommended.
The Department is proposing to amend PTE 84-24 to exclude
[[Page 76006]]
investment advice fiduciaries from the existing relief provided in
Section II, which would be redesignated as Section II(a). The proposed
amendment would add Section II(b), which would provide investment
advice fiduciaries with relief from the restrictions of ERISA sections
406(a)(1)(D) and 406(b) and the taxes imposed by Code section 4975(a)
and (b) by reason of Code sections 4975(c)(1)(E) and (F) if:
<bullet> the fiduciary is an Independent Producer (as defined in
Section X(d)),
<bullet> the transactions are described in new Section III(g), and
<bullet> the conditions set forth in new Sections VI, VII, and IX
are satisfied.
These conditions are similar to the conditions contained in PTE
2020-02 but are tailored to protect Retirement Investors from the
specific conflicts that can arise for Independent Producers that are
compensated through commissions when providing investment advice to
Retirement Investors regarding the purchase of an annuity. The
Department also is proposing to add a new eligibility provision in
Section VIII for investment advice transactions and amend the current
recordkeeping condition in Section V(e) with a new recordkeeping
provision in Section IX that is similar to the recordkeeping provision
in PTE 2020-02.
Although the Department is proposing a pathway for insurance
companies to oversee the conduct of Independent Producers under the
proposed amendment to PTE 84-24 without assuming fiduciary status, the
Department remains concerned that, without fiduciary status, insurance
companies may not take their supervisory obligations as seriously as
they should. Accordingly, the proposed amendment does not provide
relief for the Insurer, and it strictly limits the scope of relief to
the Independent Producer's receipt of fully disclosed commissions. An
Insurer must rely on PTE 2020-02 for relief if it is itself an
investment advice fiduciary because it provides investment advice
within the meaning of ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B) and the regulations issued thereunder. In addition, an
Insurer's systematic failures to comply with the proposed exemption's
conditions could result in Independent Producers' inability to rely on
the amended exemption for relief with respect to recommendations of
that Insurer's products. In such a situation, the Independent Producer
would still be able to receive compensation in connection with
fiduciary investment advice related to the products of other Insurers,
as long as those other Insurers complied with all conditions of amended
PTE 84-24.
Effective Date
The Department proposes that the amendment will be effective on the
date that is 60 days after the publication of a final amendment in the
Federal Register. Prior to the effective date, PTE 84-24 would remain
available for all insurance agents and insurance companies that
currently rely on the exemption. Thus, the Department confirms that the
restrictions of ERISA section 406(a)(1)(A), 406(a)(1)(D), and 406(b)
and the sanctions imposed by Code section 4975(a) and (b), by reason of
Code section 4975(c)(1)(A), (D), (E) and (F), would not apply to the
receipt of compensation by an Insurer, Investment Professional, or any
Affiliate and Related Entity in connection with investment advice, if
the recommendation were made before the effective date or pursuant to a
systematic purchase program established before the effective date.
Also, no party would be held to the amended conditions for a
transaction that occurred before the effective date of the amended
exemption.
Description of Changes to Existing PTE 84-24
Section II of existing PTE 84-24 provides exemptive relief for the
covered transactions described in Section III(a) through (f). The
Department is proposing minor language changes to capitalize defined
terms where they are used in the existing sections of PTE 84-24, to
update the references to a ``master or prototype plan'' to instead
refer to a ``Pre-approved Plan,'' consistent with changes in IRS Rev.
Proc. 2017-41, and to move the definitions from existing Section VI to
new proposed Section X. As amended, Section III(a)-(f) would read:
(a) The receipt, directly or indirectly, by an insurance agent or
broker or a pension consultant of a Mutual Fund Commission or an
Insurance Sales Commission from an insurance company in connection with
the purchase, with plan assets, of an insurance or annuity contract;
(b) The receipt of a Mutual Fund Commission by a Principal
Underwriter for an investment company registered under the Investment
Company Act of 1940 (hereinafter referred to as an investment company)
in connection with the purchase, with plan assets, of securities issued
by an investment company;
(c) The effecting by an insurance agent or broker, pension
consultant or investment company Principal Underwriter of a transaction
for the purchase, with plan assets, of an insurance or annuity contract
or securities issued by an investment company;
(d) The purchase, with plan assets, of an insurance or annuity
contract from an insurance company;
(e) The purchase, with plan assets, of an insurance or annuity
contract from an insurance company which is a fiduciary or a service
provider (or both) with respect to the plan solely by reason of the
sponsorship of a Pre-approved Plan; and
(f) The purchase, with plan assets, of securities issued by an
investment company from, or the sale of such securities to, an
investment company or an investment company Principal Underwriter, when
such investment company, Principal Underwriter, or the investment
company investment adviser is a fiduciary or a service provider (or
both) with respect to the plan solely by reason of: (1) the sponsorship
of a Pre-approved Plan; or (2) the provision of Nondiscretionary Trust
Services to the plan; or (3) both (1) and (2).
The Department also is proposing the following amendments.
Excluding Investment Advice
The Department is proposing to exclude investment advice
fiduciaries from relief for the transactions described in Section
III(a) through (f) of current PTE 84-24. Investment advice fiduciaries
would be required to comply with the conditions in Sections VI-VIII,
which are tailored specifically for investment advice. The Department
notes that many types of fiduciaries are already excluded from the
transactions in Sections III(a)-(d). The relief provided for in these
sections would remain available for non-fiduciaries and
nondiscretionary trustees,\8\ even if they
[[Page 76007]]
do not need all of the prohibited transaction relief provided. The
relief for the transaction described in Section III(e) would be
available for any insurance company that is a fiduciary (other than an
investment advice fiduciary) or service provider (or both) with respect
to the plan solely by reason of the sponsorship of a Pre-approved Plan.
The relief for the transaction described in Section III(f) would be
available for any insurance company, principal underwriter, or
investment company adviser that is a fiduciary (other than an
investment advice fiduciary) or service provider (or both) with respect
to the plan solely by reason of: (1) the sponsorship of a Pre-approved
Plan; or (2) the provision of nondiscretionary trust services to the
plan; or (3) both (1) and (2).\9\
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\8\ Nondiscretionary trustees were added in 1984, in response to
a request from the Investment Company Institute listing typical
nondiscretionary or trustee services. In an April 21, 1980 letter,
``ICI states nondiscretionary trustees and custodians:
(a) Open and maintain plan accounts and, in the case of defined
contribution plans, individual participant accounts, pursuant to the
employer's instructions;
(b) Receive contributions from the employer and credit them to
individual participant accounts in accordance with the employer's
instructions;
(c) Invest contributions and other plan assets in shares of a
mutual fund or funds or other products such as insurance or annuity
contracts designated by the employer, plan trustee, or participants,
and reinvest dividends and other distributions in such investments;
(d) Redeem, transfer, or exchange mutual fund shares or
surrender insurance or annuity contracts as instructed by the
employer, plan trustee, or participant;
(e) Provide or maintain ``designation of beneficiary'' forms and
make distributions from the trust or custodial account to
participants or beneficiaries in accordance with the instructions of
the employer, plan trustee, participants, or beneficiaries;
(f) Deliver to participants or their employer all notices,
prospectuses, and proxy statements, and vote proxies in accordance
with the participants' instructions.
(g) Maintain records of all contributions, investments,
distributions, and other transactions and report them to the
employer and participants;
(h) Make necessary filings with the Internal Revenue Service and
other government agencies;
(i) Keep custody of the plan's assets;
(j) Reply to and prepare correspondence, either directly or
through the mutual fund distributor or adviser, regarding the
investment account and the operation and interpretation of a master
or prototype plan sponsored by the complex to which the
nondiscretionary trustee or custodian belongs.
In some situations, the trustee or custodian is empowered to
amend the master or prototype plan; in others, this power resides in
the sponsor of the master or prototype plan. ICI further describes
the duties of the nondiscretionary trustees as ``ministerial'' and
indicates that such trustees possess no decisional authority with
respect to a plan's funding medium or subsequent purchases or
sales.''
\9\ The Department is not proposing to amend Section III(f) to
remove the phrase ``investment company adviser,'' but notes that
those providing investment advice within the meaning of ERISA
section 3(21)(A)(ii) and Code section 4975(e)(3)(B) would be
excluded under Section II(a).
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The Department requests comment on whether the relief in proposed
Section II(a) for the covered transactions in Section III(a)-(f) will
be used by fiduciaries and non-fiduciaries. The Department further asks
whether parties are currently relying on Sections III(e) and (f),
involving Pre-approved Plans. To the extent Sections III(a) through (f)
provide needed relief, the Department also asks whether the conditions
in current Sections IV and V are sufficiently protective for the
specific covered transactions.
Commissions
The Department is proposing to replace the term ``sales
commission,'' which is not defined in Section VI of existing PTE 84-24,
with the more specific terms Mutual Fund Commission and Insurance Sales
Commission. ``Insurance Sales Commission'' would be defined as a sales
commission paid by the Insurance Company or an Affiliate to the
Independent Producer \10\ for the service of recommending and/or
effecting the purchase or sale of an insurance or annuity contract,
including renewal fees and trailing fees but excluding revenue sharing
payments, administrative fees or marketing payments, payments from
parties other than the Insurance Company or its Affiliates, or any
other similar fees. ``Mutual Fund Commission'' would be defined as a
commission or sales load paid by either the Plan or the investment
company for the service of effecting or executing the purchase of
investment company securities, but does not include 12b-1 fees, revenue
sharing payments, administrative fees, management fees, or marketing
fees.
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\10\ The Insurance Sales Commission may be paid directly to an
intermediary such as an intermediary marketing organization (IMO) or
field market organization) FMO, which then compensates the
individual Independent Producer who has provided investment advice.
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The Department is proposing to use these terms to clarify the types
of compensation that can be received under the exemption. The
Department is limiting the exemption to sales commissions on insurance
or annuity contracts and investment company securities, as opposed to
any related or alternative forms of compensation. This is consistent
with the Department's historical understanding and intent. The
exemption was originally granted in 1977, and the conditions were
crafted with simple commission payments in mind. In the interim, the
exemption was not amended or formally interpreted to broadly permit
additional types of compensation. The proposed definitions would
provide certainty regarding the payments permitted by the
exemption.\11\ The Department requests comment on whether these defined
terms appropriately capture the type of compensation that an
Independent Producer may receive.
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\11\ The Department has previously expressed this view on the
scope of relief under PTE 84-24 in amending the exemption in 2016.
``The Department does not believe this exemption was properly
interpreted over the years to provide relief for payments such as
administrative services fees, which are not akin to a commission. No
determination has been made that the conditions of the exemption are
protective in the context of such payments. Without further
information on these fees, or suggested additional conditions
addressed at these types of payments, the Department declines to
take such an expansive approach to relief from the prohibited
transaction rules under the terms of this exemption.'' 81 FR 21147,
21166 (Apr. 8, 2016).
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Disclosures to IRA Owners
Section V(b)(1) of PTE 84-24 currently requires insurance agents,
brokers, or consultants to provide disclosures to an ``independent
fiduciary'' before executing a transaction involving the purchase of an
annuity with plan assets. That fiduciary must acknowledge receipt of
the disclosure in writing and approve the transaction. The Department
is proposing to clarify that for transactions involving IRAs, these
disclosures may be provided to the IRA owner instead of an unrelated
fiduciary. The Department requests comment on how frequently this
provision is currently used, how frequently it would be used with the
additional proposed changes to PTE 84-24 described below, how it is
practically implemented today, and how the revised provision would be
operationalized.
Discretionary Managers
The Department proposes to clarify the exclusion for discretionary
managers in current Section V(a)(3), which provides that the insurance
agent or broker, pension consultant, insurance company, or investment
company principal underwriter may not be a fiduciary who is expressly
authorized in writing to manage, acquire or dispose of the plan's
assets on a discretionary basis. The Department is proposing to amend
this provision to exclude fiduciaries with discretionary authority,
regardless of whether that authority has been conferred orally or in
writing. As amended, proposed Section V(a)(3) would provide that the
insurance agent or broker, pension consultant, insurance company, or
investment company principal underwriter may not be a fiduciary who is
authorized (formally or informally) to manage, acquire or dispose of
the plan's assets on a discretionary basis. The Department intends for
this change to be a mere clarification, but requests comment as to
whether fiduciaries with oral authority to manage plan assets have been
relying on PTE 84-24, because the current condition requires the
fiduciary to be ``expressly authorized in writing.''
Recordkeeping
The Department is proposing to add a new Section IX to PTE 84-24
that would require fiduciaries engaging in all transactions covered by
the exemption to maintain records necessary for the
[[Page 76008]]
following to determine that the conditions of this exemption have been
met:
(1) any authorized employee of the Department or the Internal
Revenue Service or another state or federal regulator,
(2) any fiduciary of a Plan that engaged in a transaction pursuant
to this exemption,
(3) any contributing employer and any employee organization whose
members are covered by a Plan that engaged in a transaction pursuant to
this exemption, or
(4) any participant or beneficiary of a Plan or beneficial owner of
an IRA acting on behalf of the IRA that engaged in a transaction
pursuant to this exemption.
This requirement would replace the more limited existing
recordkeeping requirement in current Section V(e).
This proposed amendment to the recordkeeping requirement is
consistent with the recordkeeping provision the Department has included
in other existing class exemptions (including the proposed amendment to
the recordkeeping provisions of PTE 2020-02). It is intended to protect
the rights of plan participants, beneficiaries, and IRA owners by
ensuring that they and the Department are provided with sufficient
information to determine whether the exemption conditions have been
satisfied.
Fiduciary Investment Advice Exemption
The relief for fiduciary investment advice in proposed Section
II(b) for the covered transactions described in proposed Section III(g)
is generally similar to the relief provided in PTE 2020-02. However,
while PTE 2020-02 is available for almost any fiduciary investment
advice provider, the amended PTE 84-24 would be available only for
investment advice that is provided to a Retirement Investor by an
Independent Producer who works with multiple insurance companies to
sell non-securities annuities or other insurance products not regulated
by the SEC. The Department requests comment on whether to exclude these
other insurance products not regulated by the SEC and limit Section
III(g) to only non-securities annuities.
Independent Producers relying on proposed Section III(g) may
reasonably rely on factual representations from the Insurer, and the
Insurer may reasonably rely on factual representations from the
Independent Producer regarding compliance with the exemption
conditions, as long as they do not know that such factual
representations are incomplete or inaccurate. For example, the
Independent Producer can rely on the Insurer's representations that it
is maintaining the required documentation.
Proposed Section VI provides conditions for transactions described
in proposed Section III(g) and would require the advice to be provided
by an Independent Producer that is authorized to sell annuities from
two or more unrelated Insurers. The term ``Independent Producer'' would
be defined in Section X as a person or entity that is licensed under
the laws of a state to sell, solicit or negotiate insurance contracts,
including annuities, and that sells products of multiple unaffiliated
insurance companies to Retirement Investors but is not an employee of
an insurance company (including a statutory employee under Code section
3121). The term ``Retirement Investor'' would be defined in proposed
Section X(o) to have the same meaning as it has in PTE 2020-02, and the
term ``Insurer'' would be defined in proposed Section X(f) similarly to
the definition of the term ``Financial Institution'' in PTE 2020-02,
except it would be limited to insurance companies.
Thus, proposed Section VI would limit the transactions described in
proposed Section III(g) to the narrow category of transactions in which
an independent, insurance-only agent provides investment advice to a
Retirement Investor regarding a non-securities annuity or insurance
contract. For all other investment advice transactions, including those
by Independent Producers that do not satisfy the conditions of the
amended PTE 84-24 and those involving captive or career insurance
agents, the advice provider would have to rely on PTE 2020-02 to
receive exemptive relief for investment advice transactions. The
Department has determined that when non-independent agents recommend
insurance products, the insurance company whose product is recommended
should be willing and able to acknowledge its fiduciary status under
ERISA and the Code when investment advice is provided to a Retirement
Investor for a fee, because it has sufficient control over the agent
and the products the agent recommends.
Even though amended PTE 84-24 would not require Insurers to be
fiduciaries, they would be subject to certain conditions when their
products are recommended. Consistent with the NAIC Suitability in
Annuity Transactions Model Regulation (the NAIC Model Regulation),\12\
and as discussed in the policies and procedures section below, the
proposed exemption would require the Insurer whose product is being
sold to provide meaningful supervision over the Independent Producer
making the recommendation and sale to the Retirement Investor. As
stated in proposed Section VI(b), the Insurer would not become an
investment advice fiduciary under ERISA and/or the Code merely by
complying with the applicable exemption conditions and providing the
required supervision. However, the Department cautions that Insurers
selling insurance and annuity products through Independent Producers
could become an investment advice fiduciary under ERISA and/or the Code
through other actions they take. If the Insurers are fiduciaries, they
could not rely on amended PTE 84-24 and would need to rely on a
different prohibited transaction exemption, such as PTE 2020-02, for
relief from ERISA section 406(b) and Code section 4975.
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\12\ Available at <a href="https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf">https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf</a>.
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To facilitate compliance with the exemption, Independent Producers
and Insurers may rely on factual representations from each other, as
long as they are reasonable in doing so. For example, an Independent
Producer may generally rely on an Insurer's written report generated as
part of its retrospective review required by Section VII(d), unless the
Independent Producer knows (or should know) that the report is
inaccurate or incomplete.
Exclusions
Section VI(c) proposes to exclude certain specific investment
advice transactions. Under proposed Section VI(c)(1), the relief would
not be available if the Plan is covered by Title I of ERISA and the
Independent Producer, Insurer, or any Affiliate is the employer of
employees covered by the Plan, or the Plan's named fiduciary or
administrator. For example, an Independent Producer that sponsors a
plan for its employees and provides the investment advice to the plan
can only receive direct expenses and not reasonable compensation for
the advice. However, there is an exception when the advice provider is
selected by an independent fiduciary. Proposed Section VI(c)(2) would
exclude transactions that involve the Independent Producer acting in a
fiduciary capacity other than as an investment advice fiduciary. Unlike
in PTE 2020-02, the Department is not proposing a specific provision
for
[[Page 76009]]
pooled employer plans, because the Department does not expect that
pooled employer plans would need to rely on the limited relief in this
exemption. The Department requests comment on whether pooled employer
plans as described in ERISA section 3(43) would rely on the investment
advice relief in amended PTE 84-24.
Impartial Conduct Standards of Amended PTE 84-24
Section VII(a) of the proposed amendment would condition relief for
investment advice transactions described in proposed Section III(g) on
the Independent Producer that is providing investment advice to
Retirement Investors complying with the Impartial Conduct Standards
that are the same as those in PTE 2020-02--i.e., acting in the
Retirement Investor's Best Interest, receiving no more than reasonable
compensation, and making no misleading statements--with some
modifications to reflect the specifics of the independent agent
channel. These standards are discussed below.
Best Interest
The Best Interest standard would require the Independent Producer
to provide investment advice that is in the Retirement Investor's Best
Interest at the time it is provided. Proposed Section VII would rely on
the same Best Interest standard from PTE 2020-02. As defined in
proposed Section X(b), Best Interest advice reflects the care, skill,
prudence, and diligence under the circumstances then prevailing that a
prudent person acting in a like capacity and familiar with such matters
would use in the conduct of an enterprise of a like character and with
like aims, based on the investment objectives, risk tolerance,
financial circumstances, and needs of the Retirement Investor, and does
not place the financial or other interests of the Independent Producer,
Insurer or any Affiliate, Related Entity, or other party ahead of the
interests of the Retirement Investor, or subordinate the Retirement
Investor's interests to those of the Independent Producer, Insurer or
any Affiliate, Related Entity, or other party. For example, in choosing
between annuity products offered by Insurers whose products the
Independent Producer is authorized to sell, the Independent Producer
may not recommend a product that is worse for the Retirement Investor
but better or more profitable for the Independent Producer or Insurer.
Reasonable Compensation
Like PTE 2020-02, the proposed exemption requires an Independent
Producer's compensation to not exceed reasonable compensation within
the meaning of ERISA section 408(b)(2) and Code section 4975(d)(2). To
tailor this condition to the specifics of insurance sales, Section
VII(a)(2) would require that the Independent Producer can only receive
an Insurance Sales Commission as compensation in connection with the
transaction.
No Misleading Statements
Proposed Section VII(a)(3) provides the same prohibition on
misleading statements that is part of PTE 2020-02. This provision
requires an Independent Producer's statements to the Retirement
Investor about the recommended transaction and other relevant matters
to not be materially misleading at the time the statements are made.
For purposes of this condition, the term ``materially misleading''
includes omitting information that is needed to make the statement not
misleading in light of the circumstances under which it was made. To
the extent the Independent Producer provides materials, including
marketing materials that are prepared and provided by the Insurer, this
condition also would require such materials not to be materially
misleading to the Independent Producer's knowledge.
Disclosure
Section VII(b) of the proposed amendment would require Independent
Producers to provide disclosures to Retirement Investors before
engaging in a transaction pursuant to this exemption. Similar to PTE
2020-02, proposed Section VII(b)(1) would require a fiduciary
acknowledgement, but unlike PTE 2020-02, only the Independent Producer
and not the Insurer must acknowledge that it is a fiduciary providing
investment advice to the Retirement Investor. Also similar to the
proposed amendment to PTE 2020-02, the Department is proposing
additional disclosures in PTE 84-24 Section VII(b) to help ensure that
Retirement Investors have sufficient information to make an informed
decision about the costs of the transaction and the significance and
severity of the Independent Producer's conflicts of interest. The
Department requests comment on these disclosures, particularly
regarding whether additional or alternative information would be
helpful to Retirement Investors receiving advice from Independent
Producers. The Department is also interested in receiving comments
regarding whether it should require Insurers or Independent Producers
to maintain a public website containing the pre-transaction disclosure,
a description of the Insurer's or Independent Producer's business
model, associated Conflicts of Interest (including arrangements that
provide third party payments), and a schedule of typical fees. The
Department is interested in receiving data and other information
regarding the benefits of such a web disclosure. The Department is also
interested in receiving any data that commenters may have that can
inform an estimate of the extent to which Retirement Investors,
investment consultants, and third party intermediaries would visit and
use a web page that includes such disclosures.
Pre-Transaction Disclosure
Similar to PTE 2020-02, proposed Section VII(b)(1) would require a
fiduciary acknowledgement, but unlike PTE 2020-02, only the Independent
Producer and not the Insurer must acknowledge that it is a fiduciary
providing investment advice to the Retirement Investor.\13\ Section
VII(b)(2) would require the Independent Producer to provide the
Retirement Investor with a written statement of the Best Interest
standard of care that the Independent Producer owes to the Retirement
Investor. Under Section VII(b)(3), the Independent Producer must
provide a written description of the services to be provided and the
Independent Producer's material Conflicts of Interest that is accurate
and not misleading in any material respects. The description will
include the products the Independent Producer is licensed and
authorized to sell and inform the Retirement Investor in writing of any
limits on the range of insurance products recommended. The Independent
Producer must identify the specific Insurers and specific investment
products available for recommendation.
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\13\ The Department cautions that an Insurer cannot insulate
itself from fiduciary status merely by not making this
acknowledgment. As noted above, an Insurer may become a fiduciary
based on its actions.
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Under proposed Section VII(b)(4), the Independent Producer would
also be required to provide a written statement of the amount of the
Insurance Sales Commission it will be paid in connection with the
purchase by the Retirement Investor of the recommended annuity. The
statement must disclose the amount of the expected Insurance Sales
Commission, in both dollars and as a percentage of gross annual premium
payments. If applicable, the statement must also disclose the amount
the Independent
[[Page 76010]]
Producer will be paid for the first year and each succeeding year.\14\
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\14\ Some insurers offer fee-based annuities which are generally
designed for sale in fee-based distribution models. These annuities
do not pay a sales commission and typically have no withdrawal
charges or lower charges than under commissioned products.
Compensation for sales of fee-based annuities is usually based on a
percentage of the annuity's account value or some other methodology.
Fee-based annuities are eligible for the relief provided by the
proposed amendment if all the conditions of the exemption are met.
If an Independent Producer recommends a fee-based annuity, the
written statement must disclose the specific method for determining
the amount of compensation for the first year and succeeding years,
expressed both in dollars and as percentage of the account value (or
other relevant value) to the extent possible.
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Under proposed Section VII(b)(5), the Independent Producer would
also be required to provide a written statement informing the
Retirement Investor of the right to obtain specific information
regarding costs, fees, and compensation, and how to obtain it, free of
charge. The statement must be written in plain English, taking into
consideration the Retirement Investor's level of financial experience,
and it must be accurate and not misleading. The cost, fee, and
compensation information may be described in dollar amounts,
percentages, formulas, or other means reasonably designed to be
materially accurate in scope, magnitude, and nature of the
compensation. The information must be detailed enough for the
Retirement Investor to make an informed judgment about the transaction
costs and the significance and severity of the Conflicts of Interest.
For example, the Retirement Investor may ask how the Independent
Producer would be compensated for recommending and selling other
products they are authorized to sell and whether the Independent
Producer is likely to receive more as a result of its recommendation
than it would have received if it had recommended other annuities.
The proposed requirement to disclose the amount of expected
Insurance Sales Commission, expressed both in dollars and as a
percentage of gross annual premium payments, if applicable, for the
first year and for each of the succeeding years is consistent with the
existing disclosure requirements in PTE 84-24 Section V(b)(1). The
proposed requirement to disclose the range of compensation is intended
to ensure that the Retirement Investor understands the magnitude of the
Independent Producer's material Conflicts of Interest. Without a single
Insurer overseeing each recommendation, Independent Producers must
carefully analyze and disclose the various incentives available from
different Insurers that could affect the recommendation. For this
reason, proposed Section VII(b)(4) requires the Independent Producer to
make specific disclosures before the sale of a recommended annuity. The
Independent Producer must consider and document its conclusions that
the recommended annuity is in the Retirement Investor's Best Interest
and provide that documentation to the Retirement Investor and the
Insurer.
To assist Independent Producers in complying with this proposed
exemption's disclosure conditions, the Department is providing the
following proposed model language that will satisfy proposed Section
VII(b)(1), (2), and (5).
When we make investment recommendations to you regarding your
retirement plan account or individual retirement account, we are
fiduciaries within the meaning of Title I of the Employee Retirement
Income Security Act and/or the Internal Revenue Code, as applicable,
which are laws governing retirement accounts. The way we make money
creates some conflicts with your interests, so we operate under a
special rule that requires us to act in your best interest and not
put our interest ahead of yours. Under this special rule's
provisions, we must:
<bullet> Meet a professional standard of care when making
investment recommendations (give prudent advice);
<bullet> Never put our financial interests ahead of yours when
making recommendations (give loyal advice);
<bullet> Avoid misleading statements about conflicts of
interest, fees, and investments;
<bullet> Follow policies and procedures designed to ensure that
we give advice that is in your best interest;
<bullet> Charge no more than is reasonable for our services; and
<bullet> Give you basic information about conflicts of interest.
You can ask us for more information explaining costs, fees, and
compensation, so that you may make an informed judgment about the
costs of the transaction and about the significance and severity of
the Conflicts of Interest. We will provide you with this information
at no cost to you.
Please note that the Department is not proposing to include model
language for Section VII(b)(3) or (4) that would describe services to
be provided, the conflicts of interest, or the commissions paid because
those will vary for each Independent Producer.
Best Interest Documentation and Rollover Disclosure
Under proposed Section II(b)(6), before the sale of a recommended
non-security annuity, the Independent Producer would consider and
document its conclusions as to whether the recommended non-security
annuity is in the Best Interest of the Retirement Investor. The
Independent Producer must provide this documentation to both the
Retirement Investor and to the Insurer whose products are being sold.
The Department requests comment on whether this proposed condition
should be expanded to other insurance products not regulated by the
SEC.
Proposed Section VII(b)(7) would further require Independent
Producers to provide a rollover disclosure that is similar to the
disclosure required in the proposed amendment to PTE 2020-02 Section
II(b)(5). Before engaging in a rollover or making a recommendation to a
Plan participant as to the post-rollover investment of assets currently
held in a Plan, the Independent Producer must consider and document its
conclusions as to whether a rollover is in the Retirement Investor's
Best Interest and provide that documentation to the Retirement
Investor. Relevant factors to consider must include but are not limited
to:
<bullet> the alternatives to a rollover, including leaving the
money in the Plan, if applicable,
<bullet> the comparative fees and expenses,
<bullet> whether an employer or other party pays for some or all
administrative expenses, and
<bullet> the different levels of fiduciary protection, services,
and investments available.
To assist the Insurer in satisfying its supervisory obligations,
the Independent Producer must also provide the documentation to the
Insurer.
Good Faith
Proposed Section VII(b)(6) provides that Independent Producers and
the Insurer may rely in good faith on information and assurances from
other entities that are not Affiliates as long as they do not know or
have reason to know that such information is incomplete or inaccurate.
Proposed Section II(b)(7) confirms that the Independent Producer would
not be required to disclose information that otherwise is prohibited by
law.
Policies and Procedures
The exemption depends on oversight by a responsible Insurer to
ensure that appropriate policies and procedures are in place. While the
exemption would not require the Insurer to act in a fiduciary capacity
or to acknowledge fiduciary status, the Insurer would be expected to
adopt and implement protective policies and procedures, and to
carefully police recommendations of its own investment products. These
requirements are consistent with supervisory requirements for insurance
[[Page 76011]]
companies under state insurance law, and do not require the Insurers to
police Independent Producers' recommendations of competitors' products.
Proposed Section VII(c) would require Insurers to establish,
maintain, and enforce written policies and procedures. These conditions
are similar to those in PTE 2020-02 Section II(c), including that
compliance with these obligations are the Insurer's responsibility and
not the Independent Producer's. Under proposed Section VII(c)(1), the
Insurer must establish, maintain, and enforce written policies and
procedures for the Insurer to review each of the Independent Producer's
recommendations before an annuity is issued to a Retirement Investor.
The policies and procedures must be prudently designed to ensure
compliance with the Impartial Conduct Standards and other conditions of
this exemption. This requirement is similar to that in PTE 2020-02 and
is consistent with the language in NAIC Model Regulation Section
6.C.(2)(d), which provides that ``[t]he insurer shall establish and
maintain procedures for the review of each recommendation prior to
issuance of an annuity that are designed to ensure there is a
reasonable basis to determine that the recommended annuity would
effectively address the particular consumer's financial situation,
insurance needs and financial objectives.'' Under the proposal, the
Insurer's prudent review of the Independent Producer's specific
recommendations must be made without regard to the Insurer's own
interests or those of its affiliates and related entities.
The Department notes that the NAIC Model Regulation contemplates
that insurance companies will maintain a system of oversight with
respect to insurance agents. Insurers could implement procedures to
review annuity sales to Retirement Investors to ensure that they are
made in compliance with the Impartial Conduct Standards similar to how
they currently are required to review annuity sales to ensure
compliance with the state-law suitability requirements.\15\ Section I
of the NAIC Model Regulation provides that the purpose of the
regulation is to ``require producers, as defined in this regulation, to
act in the best interest of the consumer when making a recommendation
of an annuity and to require insurers to establish and maintain a
system to supervise recommendations so that the insurance needs and
financial objectives of consumers at the time of the transaction are
effectively addressed.'' \16\ Accordingly, the Department believes that
a system of oversight by Insurers over Independent Producers is
consistent with the obligations imposed by NAIC's Model Regulation, and
is achievable under this proposed amendment to PTE 84-24.
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\15\ NAIC Model Regulation Section 6.C.(2)(d) provides that
``[t]he insurer shall establish and maintain procedures for the
review of each recommendation prior to issuance of an annuity that
are designed to ensure that there is a reasonable basis to determine
that the recommended annuity would effectively address the
particular consumer's financial situation, insurance needs and
financial objectives. Such review procedures may apply a screening
system for the purpose of identifying selected transactions for
additional review and may be accomplished electronically or through
other means including, but not limited to, physical review. Such an
electronic or other system may be designed to require additional
review only of those transactions identified for additional review
by the selection criteria''). Section 6.C.(2)(e) provides that
``[t]he insurer shall establish and maintain reasonable procedures
to detect recommendations that are not in compliance with
subsections A, B, D and E. This may include, but is not limited to,
confirmation of the consumer's consumer profile information,
systematic customer surveys, producer and consumer interviews,
confirmation letters, producer statements or attestations and
programs of internal monitoring. Nothing in this subparagraph
prevents an insurer from complying with this subparagraph by
applying sampling procedures, or by confirming the consumer profile
information or other required information under this section after
issuance or delivery of the annuity.''
\16\ Id., Section 1.A.
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In terms of the specific oversight requirements, the Department
confirms that under the proposed amendment, an Insurer would only be
required to supervise an Independent Producer's recommendations of the
annuities it offers to Retirement Investors. The Insurer would not be
required to review annuities offered by another institution. The
Department also clarifies that the exemption would not require the
Insurer to consider or compare the specific annuities that an
Independent Producer sells or the compensation relating to those
annuities, unless they are annuities the Insurer offers. This approach
is also consistent with the approach of NAIC Model Regulation Section
6.C.(4).\17\
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\17\ NAIC Model Regulation Section 6.C.(4) provides that an
insurer is not required to include in its system of supervision: (a)
A producer's recommendations to consumers of products other than the
annuities offered by the insurer; or (b) Consideration of or
comparison to options available to the producer or compensation
relating to those options other than annuities or other products
offered by the insurer.
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Under proposed Section VII(c)(2), the Insurer's policies and
procedures must mitigate Conflicts of Interest to the extent that a
reasonable person reviewing the policies and procedures and the
Insurer's incentive practices as a whole would conclude that they do
not create an incentive for the Independent Producer to place its
interests, or those of the Insurer, or any Affiliate, ahead of the
Retirement Investor's interests. The Insurer's procedures must identify
and eliminate quotas, appraisals, bonuses, contests, special awards,
differential compensation, riders and or other similar features that
are intended, or that a reasonable person would conclude are likely, to
incentivize Independent Producers to provide recommendations that do
not meet the Impartial Conduct Standards. This is the same condition
that applies to Financial Institutions under Section II(c)(2) of PTE
2020-02. It is also consistent with, although more protective than, the
narrower NAIC Model Regulation section 6.C.(2)(h), which prohibits an
insurer from establishing sales contests, sales quotas, bonuses, and
non-cash compensation that are based on sales of specific annuities
within a limited period of time.
Under proposed Section VII(c)(2), an Insurer could not offer
incentive vacations, trips, or even educational conferences, if
qualification for the vacation, trip or conference is based on sales
volume or satisfaction of sales quotas. The Best Interest standard
discussed above and defined in proposed Section X(b) clearly prohibits
these types of incentives on the grounds they create undue conflicts of
interest. Moreover, the Department believes that educational
opportunities should be offered equally to all agents and not connected
to sales volume, because training is a necessary component of providing
Best Interest advice. This emphasis on Independent Producer training is
consistent with NAIC Model Regulation section 6.C.(2)(c), which
requires insurers to provide its producers with product-specific
training and training materials that explain all material features of
its annuity products.
Under proposed Section VII(c)(3), the Insurer's policies and
procedures must include a prudent process for determining whether to
authorize an Independent Producer to sell the Insurer's annuity
contracts to Retirement Investors. It must also include a prudent
process for taking action to protect Retirement Investors from
Independent Producers who have failed or are likely to fail to adhere
to the Impartial Conduct Standards, or who lack the necessary
education, training, or skill. This is consistent with, but more
protective than, NAIC Model Regulation section 7.B.(11), which requires
an insurer to verify the producer has completed the annuity training
course required under NAIC
[[Page 76012]]
Model Regulation section 7 before allowing the producer to sell an
annuity product for that insurer.
As part of a prudent evaluation of an Independent Producer's
background, the Insurer must carefully review customer complaints,
disciplinary history, and regulatory actions concerning the Independent
Producer, as well as the Independent Producer's training, education,
and conduct with respect to the Insurer's own products. The Insurer
must document the basis for its initial determination that it can rely
on the Independent Producer to adhere to the Impartial Conduct
Standards, and it must review that determination at least annually as
part of the retrospective review. The Department notes that Insurers
may rely in part on an automated system to apply general standards and
review formal discipline records, as long as careful, individual review
is applied when the general review raises concerns. However, the
Department expects that an Insurer would not work with an Independent
Producer that either has been barred by any regulator from selling
insurance or annuity contracts, or that is ineligible to rely on either
PTE 2020-02 or the amended PTE 84-24 under proposed Section VIII. The
Department requests comments on these requirements and is specifically
interested in the systems Insurers currently use to determine whether
Independent Producers are compliant with state insurance obligations.
The Department is also interested in comments about how Insurers have
operationalized the supervisory requirements in the NAIC Model
Regulation.
Under proposed Section VII(c)(4), Insurers must provide their
complete policies and procedures to the Department within 10 days upon
request. The Department believes that ensuring its access to policies
and procedures will facilitate the quicker resolution of disputes and
allow the Department, if it desires, to survey the policies and
procedures for exemption compliance and effectiveness.
Retrospective Review
Proposed Section VII(d) would require Insurers to conduct a
retrospective review, at least annually. The retrospective review must
be reasonably designed to detect and prevent violations of, and achieve
compliance with the Impartial Conduct Standards, the terms of this
exemption, and the policies and procedures governing compliance with
the exemption, including the effectiveness of the supervision system,
any noncompliance discovered in connection with the review, and
corrective actions taken or recommended, if any.
The retrospective review requirement is similar to that in Section
II(d) of PTE 2020-02. However, unlike PTE 2020-02, Insurers under
proposed Section VII(d) of PTE 84-24 must include in their review a
prudent determination whether to continue to permit individual
Independent Producers to sell the Insurer's annuity contracts to
Retirement Investors. This review does not need to be as extensive as
the initial decision to contract with an Independent Producer. An
Insurer may consider any change in discipline records that are found in
widely-available databases and rollover documentations that have been
provided under Section VII(c)(5). Additionally, the Insurer must update
the policies and procedures as business, regulatory, and legislative
changes and events dictate, and to ensure they remain prudently
designed, effective, and compliant with Section VII(c).
Consistent with both PTE 2020-02 and the NAIC Model Regulation
Section 6.C.(2)(i),\18\ proposed Section VII(d)(2) would require the
Insurer to provide a Senior Executive Officer with an annual written
report which details the review. Under Section VII(d)(3), the
Department would further require the Insurer to provide the Independent
Producer with the underlying methodology and results of the
retrospective review. The Department understands that Insurers will
conduct reviews for many different Independent Producers and confirms
that Independent Producers only have the right to information about
their own sales. There is no obligation to inform any Independent
Producers of an unrelated Independent Producer's failure.
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\18\ NAIC Model Reg Section 6.(C)(i) provides that: ``The
insurer shall annually provide a written report to senior
management, including to the senior manager responsible for audit
functions, which details a review, with appropriate testing,
reasonably designed to determine the effectiveness of the
supervision system, the exceptions found, and corrective action
taken or recommended, if any.''
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Proposed Section VII(d)(4) would require a Senior Executive Officer
of the Insurer to annually certify that:
<bullet> The officer has reviewed the retrospective review report,
<bullet> The Insurer has filed (or will file timely, including
extensions) Form 5330, reporting any non-exempt prohibited transaction
discovered by the Insurer in connection with investment advice covered
under Code section 4975(e)(3)(B),
<bullet> The Insurer has advised the Independent Producer of the
violation and any resulting excise taxes owed under Code section 4975,
and
<bullet> The Insurer has notified the Department of Labor of the
violation via email to <a href="/cdn-cgi/l/email-protection#f6a6a2b3a9cec2dbc4c2b692999ad8919980"><span class="__cf_email__" data-cfemail="19494d5c46212d342b2d597d7675377e766f">[email protected]</span></a>.
<bullet> The Insurer has established policies and procedures
prudently designed to ensure that Independent Producers achieve
compliance with the conditions of this exemption, and has updated and
modified the policies and procedures as appropriate after consideration
of the findings in the retrospective review report; and
<bullet> The Insurer has in place a prudent process to modify such
policies and procedures as business, regulatory, and legislative
changes and events dictate, as well as a prudent process to test the
effectiveness of such policies and procedures on a periodic basis, to
ensure its continuing compliance with the exemption's conditions.
Under proposed Section VII(d)(5), the review, report, and
certification must be completed no later than 6 months following the
end of the period covered by the review, and proposed Section VII(d)(6)
would require the Insurer to retain the report, certification, and
supporting data for a period of six years and make the report,
certification, and supporting data available to the Department, within
10 business days of request, to the extent permitted by law.
Self-Correction
While the Insurer is responsible for the retrospective review,
proposed Section VII(e) would allow the Independent Producer to make
the corrections needed to avoid a non-exempt prohibited transaction in
certain circumstances. Self-correction would be allowed in cases when
either (1) the Independent Producer has refunded any charge to the
Retirement Investor or (2) the Insurer has rescinded a mis-sold
annuity, canceled the contract, and waived the surrender charges. This
is somewhat different from the self-correction provision in PTE 2020-
02, which is focused on investment losses. With a fixed annuity, the
consumer is guaranteed not to lose any account value but can incur a
charge (and hence a loss) if the contract is surrendered during the
surrender charge period. The usual remedy for a mis-sold annuity is
rescission, which requires the insurer to cancel the contract and waive
surrender charges. Under the proposed amendment, the Independent
Producer must notify the Department of the violation and the refund or
rescission via email to <a href="/cdn-cgi/l/email-protection#0f5f5b4a50373b223d3b4f6b606321686079"><span class="__cf_email__" data-cfemail="1a4a4e5f45222e37282e5a7e7576347d756c">[email protected]</span></a> within 30 days of correction.
The correction must occur no later than 90 days after the Independent
Producer learned, or
[[Page 76013]]
reasonably should have learned, of the violation. Lastly, the
Independent Producer must notify the person(s) at the Insurer
responsible for conducting the retrospective review during the
applicable review cycle and the violation and correction must
specifically be set forth in the written retrospective review report.
Eligibility
Section VIII of the proposed amendment identifies circumstances
under which an Independent Producer or Insurer would become ineligible
to rely on the exemption for 10 years, and also circumstances when an
entity would not be permitted to serve as an Insurer under this
exemption for 10 years. These eligibility provisions are similar to the
provisions of Section III of PTE 2020-02, and are intended to promote
compliance. Section VIII(a) describes how Independent Producers can
become ineligible. The proposed amendment sets forth the specific
crimes (including foreign crimes) that could cause ineligibility in
Section III(a)(1). Independent Producers would also become ineligible
if they are issued a written ineligibility notice from the Department
stating that they: (A) engaged in a systematic pattern or practice of
violating the conditions of this exemption; (B) intentionally violated,
or knowingly participated in violations of, the conditions of this
exemption; (C) engaged in a systematic pattern or practice of failing
to correct prohibited transactions, report those transactions to the
IRS on Form 5330, and pay excise taxes involving investment advice; or
(D) provided materially misleading information to the Department in
connection with the its conduct under the exemption. Independent
Producers would become ineligible six months after the conviction date,
the date of the Department's written determination regarding a foreign
conviction, or the date of the Department's written ineligibility
notice, as applicable. During the six-month period, the Independent
Producers are still fiduciaries, subject to all of the fiduciary
requirements and prohibited transaction rules. Thus, Independent
Producers must continue to comply with the exemption during those six
months, and any transactions that do not meet the terms of the
exemption will be subject to excise tax and ERISA penalties. The
ineligibility remains in effect until the earliest of: a subsequent
judgement reversing a person's conviction, 10 years after the person
became ineligible or is released from imprisonment, if later, or the
Department grants an individual exemption permitting reliance on this
exemption, notwithstanding the conviction.
Section VIII(b) delineates similarly eligibility provisions for
Insurers. An entity will be ineligible to serve as an Insurer with
respect to the exemption if it has a conviction for a crime listed
under Section VIII(b)(1) or has been determined to be ineligible under
Section VIII(b)(2). Furthermore, because Insurers that fail to satisfy
the conditions of this exemption would not necessarily engage in a non-
exempt prohibited transaction, their eligibility to rely on this
exemption would not be linked to engaging in a systematic pattern or
practice of failing to correct prohibited transactions, report those
transactions to the IRS on Form 5330, and pay excise taxes imposed by
Code section 4975 in connection with non-exempt prohibited transactions
involving investment advice under Code section 4975(e)(3)(B). The
Department notes that, as a fiduciary, before recommending an insurance
product the Independent Producer is responsible for ensuring that the
relevant insurance company is an Insurer permitted to sell its products
through Independent Producers and Section VIII. The Independent
Producer may reasonably rely on an Insurer's representations to it
regarding the Insurer's continued eligibility under the exemption.
Insurers would become ineligible six months after the conviction
date, the date of the Department's written determination regarding a
foreign conviction, or the date of the Department's written
ineligibility notice, as applicable. Unlike Independent Producers,
Insurers might not be fiduciaries; therefore, they might not be subject
to all fiduciary requirements during the six-month period. As
fiduciaries, the Independent Producers should be aware of whether they
are selling products of any Insurers that will become ineligible within
six months. The ineligibility remains in effect until the earliest of:
a subsequent judgement reversing a person's conviction, 10 years after
the person became ineligible or is released from imprisonment, if
later, or the Department grants an individual exemption permitting
reliance on this exemption, notwithstanding the conviction.
Proposed Section VIII(c) would provide Independent Producers and
Insurers with the opportunity to be heard. Like PTE 2020-02, there
would be no separate evidentiary hearing following conviction by a U.S.
federal or state court of competent jurisdiction, but Section
XVIII(c)(1) would allow Insurers and Independent Producers to submit a
petition informing the Department of the conviction and seeking a
determination that continued reliance on the exemption would not be
contrary to the purposes of the exemption.
Proposed Section VIII(c)(2) would allow Independent Producers and
Insurers to request an evidentiary hearing before becoming ineligible
and losing access to the exemption. Before issuing a written
ineligibility notice, the Department will issue a written warning to
the Independent Producer or Insurer, as applicable, identifying
specific conduct implicating proposed Section VIII(a)(2) or (b)(2), as
applicable. The Insurer or Independent Producer then has a six-month
opportunity to correct their conduct. At the end of the six-month
period, if the Department determines that the Independent Producer or
Insurer has not taken appropriate action to prevent recurrence of the
disqualifying conduct, it will give the Independent Producer or Insurer
the opportunity to be heard in person (including by phone or
videoconference), in writing, or a combination thereof, before the
Department issues the written ineligibility notice. The opportunity to
be heard will be limited to one conference unless the Department
determines in its sole discretion to allow additional conferences.
Following a hearing for either foreign convictions or other
misconduct, the Department's determination will be based solely on its
discretion. The Department will consider the following when making its
determination:
<bullet> the gravity of the offense;
<bullet> the degree to which the underlying conduct concerned
individual misconduct, or, alternately, corporate managers or policy;
<bullet> recency of the conduct at issue;
<bullet> any remedial measures the Independent Producer or Insurer
has taken upon learning of the underlying conduct; and
<bullet> other factors the Department determines in its discretion
are reasonable in light of the nature and purposes of the exemption.
If the Department issues a written ineligibility notice, the notice
will articulate the basis for the Department's determination that the
Independent Producer or Insurer engaged in conduct described in Section
VIII(a)(2).
If an Insurer or Independent Producer is ineligible to rely on
amended PTE 84-24, proposed Section VIII(d) provides that the Insurer
or Independent Producer may rely on a statutory or
[[Page 76014]]
separate administrative prohibited transaction exemption if one is
available or seek an individual prohibited transaction exemption from
the Department. The Department notes that PTE 2020-02 will generally be
available for insurance companies that are ineligible to serve as
Insurers under PTE 84-24. However, the Department may, as part of its
eligibility determination process, determine that an entity is not
eligible for either PTE 2020-02 or PTE 84-24. The written warning,
opportunity to be heard, and written ineligibility notice would each
clearly state the exemption or exemptions for which ineligibility was
being considered.
If an Insurer cannot sell its products under PTE 84-24, the
Department would consider an application for an individual exemption
for that Insurer, and any resulting exemption would likely require the
Insurer to be a fiduciary and acknowledge fiduciary status. If an
applicant seeks retroactive relief in connection with an exemption
application, the Department will consider the application in accordance
with its retroactive exemption policy.\19\ The Department may require
additional prospective compliance conditions as a condition of
retroactive relief. The Department requests comments on the process
described above, including whether it would be helpful to provide
greater details about the evidentiary hearing and the written
ineligibility notice, and, if so, what details are necessary.
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\19\ Set forth in 29 CFR 2570.35(d).
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Recordkeeping
As discussed above, the Department is proposing to add a new
Section IX to PTE 84-24, which would require the party engaging in a
transaction covered by the exemption to maintain records necessary to
enable certain persons (described in proposed Section IX(a)(2)) to
determine whether the conditions of this exemption have been met. This
provision would apply to all of the conditions of PTE 84-24, replacing
the more limited existing recordkeeping requirement in current Section
V(e). This proposed recordkeeping requirement is consistent with PTE
2020-02 and is intended to protect the rights of plan participants and
beneficiaries and IRA owners by ensuring that they and the Department
have sufficient information to confirm that that exemption conditions
have been satisfied.
Executive Order 12866 and 13563 Statement
Executive Orders 12866 and 13563 direct agencies to assess all
costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects; distributive impacts; and equity). Executive
Order 13563 emphasizes the importance of quantifying costs and
benefits, reducing costs, harmonizing rules, and promoting flexibility.
Under Executive Order 12866, as amended by Executive Order 14094,
``significant'' regulatory actions are subject to review by the Office
of Management and Budget (OMB). Section 3(f) of the Executive Order
defines a ``significant regulatory action'' as an action that is likely
to result in a rule (1) having an annual effect on the economy of $200
million or more, or adversely and materially affecting a sector of the
economy, productivity, competition, jobs, the environment, public
health or safety, or state, local, or tribal governments or
communities; (2) creating a serious inconsistency or otherwise
interfering with an action taken or planned by another agency; (3)
materially altering the budgetary impacts of entitlement grants, user
fees, or loan programs or the rights and obligations of recipients
thereof; or (4) raising legal or policy issues for which centralized
review would meaningfully further the President's priorities or the
principles set forth in the Executive Order. It has been determined
that this proposal is a ``significant regulatory action'' within the
scope of section 3(f)(1) of the Executive Order.
Therefore, the Department has provided an assessment of the
proposal's potential costs, benefits, and transfers, and OMB has
reviewed this proposed amendment pursuant to the Executive Order.
Paperwork Reduction Act
As part of its continuing effort to reduce paperwork and respondent
burden, the Department conducts a preclearance consultation program to
allow the general public and Federal agencies to comment on proposed
and continuing collections of information in accordance with the
Paperwork Reduction Act of 1995 (PRA). This helps ensure that the
public understands the Department's collection instructions,
respondents can provide the requested data in the desired format,
reporting burden (time and financial resources) is minimized,
collection instruments are clearly understood, and the Department can
properly assess the impact of collection requirements on respondents.
The Department is soliciting comments regarding the information
collection request (ICR) included in the proposed amendments to the
ICR. To obtain a copy of the ICR, contact the PRA addressee below or go
to <a href="http://RegInfo.gov">RegInfo.gov</a>. The Department has submitted a copy of the rule to the
OMB in accordance with 44 U.S.C. 3507(d) for review of its information
collections. The Department and OMB are particularly interested in
comments that:
<bullet> Evaluate whether the collection of information is
necessary for the functions of the agency, including whether the
information will have practical utility;
<bullet> Evaluate the accuracy of the agency's estimate of the
burden of the collection of information, including the validity of the
methodology and assumptions used;
<bullet> Enhance the quality, utility, and clarity of the
information to be collected; and
<bullet> Minimize the burden of the collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology (e.g., permitting
electronically delivered responses).
Commenters may send their views on the Departments' PRA analysis in
the same way they send comments in response to the proposed rule as a
whole (for example, through the <a href="http://www.regulations.gov">www.regulations.gov</a> website), including
as part of a comment responding to the broader proposed rule. Comments
are due by January 2, 2024 to ensure their consideration.
PRA Addressee: Address requests for copies of the ICR to James
Butikofer, Office of Research and Analysis, U.S. Department of Labor,
Employee Benefits Security Administration, 200 Constitution Avenue NW,
Room N-5718, Washington, DC 20210, or <a href="/cdn-cgi/l/email-protection#eb8e89988ac5849b99ab8f8487c58c849d"><span class="__cf_email__" data-cfemail="6e0b0c1d0f40011e1c2e0a010240090118">[email protected]</span></a>. ICRs also are
available at <a href="http://www.RegInfo.gov">http://www.RegInfo.gov</a> (<a href="http://www.reginfo.gov/public/do/PRAMain">http://www.reginfo.gov/public/do/PRAMain</a>).
As discussed in detail above, PTE 84-24, as amended, would exclude
investment advice fiduciaries from the existing relief provided in
Section II, which would be redesignated as Section II(a) and add new
Sections VI-VIII, which would provide relief for investment advice
limited to the narrow category of transactions in which an
[[Page 76015]]
independent, insurance-only agent, or Independent Producer, provides
investment advice to a Retirement Investor regarding an annuity or
insurance contract. Additionally, as amended, the exemption requires
the Independent Producers 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.
Financial institutions and investment professionals that engage in
all other investment advice transactions, including those involving
captive or career insurance agents would rely on PTE 2020-02 to receive
exemptive relief for investment advice transactions. The amendment
would revise the recordkeeping requirements for all entities relying on
PTE 84-24. Additionally, for Independent Producers, the exemption would
require entities to make certain new disclosures, conduct an annual
retrospective review, and comply with policy and procedure
requirements.
These requirements are ICRs subject to the PRA. Readers should note
that the burden discussed below conforms to the requirements of the PRA
and is not the incremental burden of the changes.\20\
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\20\ For a more detailed discussion of the marginal costs
associated with the proposed amendments to PTE 84-24, refer to the
Notice of Proposed Rulemaking published elsewhere in today's edition
of the Federal Register.
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1.1 Preliminary Assumptions
In the analysis discussed below, a combination of personnel would
perform the tasks associated with the ICRs at an hourly wage rate of
$158.94 for an Independent Producer, $63.45 for clerical personnel, and
$159.34 for a legal professional, and $128.11 for a senior
executive.\21\
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\21\ Internal Department calculation based on 2023 labor cost
data. For a description of the Department's methodology for
calculating wage rates, see <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/technical-appendices/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-june-2019.pdf</a>.
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The Department does not have information on how many Retirement
Investors, including plan beneficiaries and participants and IRA
owners, receive disclosures electronically from investment advice
fiduciaries. For the purposes of this analysis, the Department assumes
that the percent of Retirement Investors receiving disclosures
electronically would be similar to the percent of plan participants
receiving disclosures electronically under the Department's 2020
electronic disclosure rules.\22\ Accordingly, the Department estimates
that 94.2 percent of the disclosures sent to Retirement Investors would
be sent electronically, and the remaining 5.8 percent would be sent by
mail.\23\ The Department requests comment on these assumptions.
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\22\ 67 FR 17263 (Apr. 9, 2002).
\23\ The Department estimates approximately 94.2% of Retirement
Investors receive disclosures electronically, which is the sum of
the estimated share of Retirement Investors receiving electronic
disclosures under the 2002 electronic disclosure safe harbor (58.2%)
and the estimated share of Retirement Investors receiving electronic
disclosures under the 2020 electronic disclosure safe harbor
(36.0%).
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The Department assumes any documents sent by mail would be sent by
First Class Mail, incurring a postage cost of $0.66 for each piece of
mail.\24\ Additionally, the Department assumes that documents sent by
mail would incur a material cost of $0.05 for each page.
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\24\ United States Post Service, First-Class Mail, (2023),
<a href="https://www.usps.com/ship/first-class-mail.htm">https://www.usps.com/ship/first-class-mail.htm</a>.
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1.2 Costs Associated With Satisfying Conditions for Transactions
Described in Section III(a)-(f)
Insurance agents and brokers, pension consultants, insurance
companies, and investment company principal underwriters are expected
to continue to take advantage of the exemption for transactions
described in Section III(a)-(f). The Department estimates that 2,986
insurance agents and brokers, pension consultants, and insurance
companies will continue to take advantage of the exemption for
transactions described in Section III(a)-(f). This estimate is based on
the following assumptions:
<bullet> According to the Insurance Information Institute, in 2022,
there were 3,328 captive agents, which are insurance agents who work
for only one insurance company.\25\ The Insurance Information Institute
also found that life and annuity insurers accounted for 47.4 percent of
all net premiums for the insurance industry in 2022.\26\ Thus, the
Department estimates there are 1,577 insurance agents and brokers
relying on the existing provisions.\27\
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\25\ Insurance Information Institute, A Firm Foundation: How
Insurance Supports the Economy--Captives by State, 2021-2022,
<a href="https://www.iii.org/publications/a-firm-foundation-how-insurance-supports-the-economy/a-50-state-commitment/captives-by-state">https://www.iii.org/publications/a-firm-foundation-how-insurance-supports-the-economy/a-50-state-commitment/captives-by-state</a> (last
visited August 25, 2023).
\26\ Insurance Information Institute, Facts + Statistics:
Industry Overview- Insurance Industry at-a-Glance, <a href="https://www.iii.org/fact-statistic/facts-statistics-industry-overview">https://www.iii.org/fact-statistic/facts-statistics-industry-overview</a>.
\27\ The number of captive insurance agents is estimated as:
(3,328 captive agents x 47.4%) = 1,577 captive insurance agents
serving the annuity market.
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<bullet> The Department expects that pension consultants would
continue to rely on the existing PTE 84-24. Based on 2021 Form 5500
data, the Department estimates that 1,011 pension consultants serve the
retirement market.\28\
---------------------------------------------------------------------------
\28\ Internal Department of Labor calculations based on the
number of unique service providers listed as pension consultants on
the 2021 Form 5500 Schedule C.
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<bullet> In the Department's 2016 Regulatory Impact Analysis, it
estimated that 398 insurance companies wrote annuities.\29\ The
Department requests information on how the number of insurance
companies underwriting annuities has changed since then.
---------------------------------------------------------------------------
\29\ This estimate is based on 2014 data from SNL Financial on
life insurance companies that reported receiving either individual
or group annuity considerations. (See Employee Benefits Security
Administration, Regulating Advice Markets Definition of the Term
``Fiduciary'' Conflicts of Interest--Retirement Investment Advice
Regulatory Impact Analysis for Final Rule and Exemptions, (April
2016), <a href="https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf</a>.)
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In addition, investment company principals may rely on the
exemption. In the Department's experience, investment company principal
underwriters almost never use PTE 84-24. Therefore, the Department
assumes that 20 investment company principal underwriters will engage
in one transaction annually under PTE 84-24, 10 of which are assumed to
service plans and 10 are assumed to service IRAs.
The Department requests comments on how many entities currently
rely on PTE 84-24 for transactions that do not involve investment
advice and would continue to rely on the exemption as amended.
Further, the Department estimates that there are approximately
765,124 ERISA covered pension plans \30\ and approximately 67.8 million
IRAs.\31\ The Department estimates that 7.5 percent of plans are new
accounts or new financial advice relationships \32\ and that 3 percent
of plans will use the exemption for covered transactions.\33\ Based on
these assumptions, the Department estimates that 1,722 plans would be
[[Page 76016]]
affected by the proposed amendments to PTE 84-24.\34\
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\30\ Employee Benefits Security Administration, United States
Department of Labor, Private Pension Plan Bulletin: Abstract of 2021
Form 5500 Annual Reports, Table A1 (2023; forthcoming).
\31\ Cerulli Associates, 2023 Retirement-End Investor, Exhibit
5.12. The Cerulli Report, (2023).
\32\ EBSA identified 57,575 new plans in its 2021 Form 5500
filings, or 7.5 percent of all Form 5500 pension plan filings.
\33\ In 2020, 7 percent of traditional IRAs were held by
insurance companies. (See Investment Company Institute, The Role of
IRAs in US Households' Saving for Retirement, 2020, 27(1) ICI
Research Perspective (2021), <a href="https://www.ici.org/system/files/attachments/pdf/per27-01.pdf">https://www.ici.org/system/files/attachments/pdf/per27-01.pdf</a>.) This number has been adjusted
downward to 3 percent to account for the fact that some transactions
are not covered by this exemption.
\34\ 765,124 plans x 7.5 percent of plans are new x 3 percent of
plans with relationships with insurance agents or pension
consultants = 1,722 plans.
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The proposed amendments to 84-24 would also affect new IRA
accounts. The Department does not have data on the number of new IRA
accounts that are opened each year. However, in 2022, of the 67.8
million IRA owners, 1.4 million, or approximately 2.1 percent, opened
an IRA for the first time.\35\ Inferring from this statistic, the
Department estimates that 2.1 percent of IRA accounts are new each
year. The Department acknowledges that some IRA owners may have
multiple IRAs, and as such, this statistic may underestimate the
percentage of new IRAs opened.\36\ Additionally, the Department
estimates that about 3 percent of these new IRAs, or approximately
52,000 IRAs, would use PTE 84-24 for covered transactions.\37\
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\35\ Cerulli Associates, U.S. Retirement End-Investor 2023:
Fostering Comprehensive Relationships, The Cerulli Report.
\36\ The Department lacks data on the number of IRA owners that
own multiple IRAs. To provide scope of magnitude, one source
reported that in 2019, 19 percent of IRA owners contributed to both
a traditional IRA and Roth IRA. (See Investment Company Institute,
The Role of IRAs in US Households' Saving for Retirement, 2020,
27(1) ICI Research Perspective (2021), <a href="https://www.ici.org/system/files/attachments/pdf/per27-01.pdf">https://www.ici.org/system/files/attachments/pdf/per27-01.pdf</a>.) This statistic does not account
for individuals who own multiple IRAs of each type or those who did
not contribute in 2019, but it provides a lower bound.
\37\ In 2020, 7 percent of traditional IRAs were held by
insurance companies. (See Investment Company Institute, The Role of
IRAs in US Households' Saving for Retirement, 2020, 27(1) ICI
Research Perspective (2021), <a href="https://www.ici.org/system/files/attachments/pdf/per27-01.pdf">https://www.ici.org/system/files/attachments/pdf/per27-01.pdf</a>.) This number has been adjusted
downward to 3 percent to reflect the removal of transactions not
covered by this exemption. The number of IRAs affected is estimated
as: (83,252,750 IRAs x 2.1% IRAs assumed to be new IRAs x 3% of IRAs
held by insurance companies) = 52,449 IRAs.
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The proposed amendment would exclude entities currently relying on
the exemption, under the existing provisions for investment advice. As
such, the Department acknowledges that the estimates discussed above
may overestimate the entities able to rely on the exemption for relief
for the transactions described in Section III(a)-(f). The Department
requests comment or data on whether the relief in proposed Section
II(a) for the covered transactions in Section III(a)-(f) would still be
utilized after investment advice is excluded.
1.2.1. Written Authorization From the Independent Plan Fiduciary
Based on the estimates discussed above, the Department estimates
that authorizing fiduciaries for 1,722 plans and authorizing
fiduciaries for 52,449 IRA holders would be required to send an advance
written authorization to the 2,996 financial institutions for IRAs \38\
for exemptive relief for the transactions described in Section III(a)-
(f).
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\38\ This includes 2,986 insurance agents and brokers, pension
consultants, and insurance companies and 10 investment company
underwriters servicing IRAs.
---------------------------------------------------------------------------
In the plan universe, it is assumed that a legal professional would
spend five hours per plan reviewing the disclosures and preparing an
authorization form. In the IRA universe, it is assumed that a legal
professional working on behalf of the financial institution for IRAs
will spend three hours drafting an authorization form for IRA holders
to sign. This results in an hour burden of 17,598 hours with an
equivalent cost of $2.8 million.\39\
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\39\ The burden is estimated as: (1,722 plans x 5 hours) +
(2,996 financial institutions x 3 hours) = 17,598 hours. A labor
rate of approximately $159.34 is used for a legal professional. The
labor rate is applied in the following calculation: [(1,722 plans x
5 hours) + (2,996 financial institutions x 3 hours)] x $159.34 per
hour = $2,804,065.
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The Department expects that plans will send the written
authorization through already established electronic means, and thus,
the Department does not expect plans to incur any cost to send the
authorization. The Department expects that 94.2 percent of written
authorization for IRAs will be sent electronically at no additional
burden. The remaining 5.8 percent of authorizations will be mailed. For
paper authorizations, the Department assumes that clerical staff will
spend two minutes preparing and sending the authorization resulting in
an hour burden of approximately 101 hours with an equivalent cost of
$6,434.\40\
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\40\ The burden is estimated as: ((52,449 IRAs x 5.8 percent
paper x 2 minutes per plan) / 60 minutes) = 101 hours. A labor rate
of $63.45 is used for a clerical worker. The labor rate is applied
in the following calculation: ((52,449 IRAs x 5.8 percent paper x 2
minutes per plan) / 60 minutes) x $63.45 per hour = $6,434.
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In total, as presented in the table below, the written
authorization requirement, under the new conditions of relief, is
expected to result in an annual total hour burden of 17,699 hours with
an equivalent cost of $2,810,499.
Table 1--Hour Burden and Equivalent Cost Associated With the Written Authorization
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------------
Activity Equivalent burden
Burden hours cost Burden hours Equivalent burden cost
----------------------------------------------------------------------------------------------------------------
Legal......................... 17,598 $2,804,065 17,598 $2,804,065
Clerical...................... 101 6,434 101 6,434
---------------------------------------------------------------------------------
Total..................... 17,699 2,810,499 17,699 2,810,499
----------------------------------------------------------------------------------------------------------------
The Department assumes 5.8 percent of authorizations for IRAs would
be distributed by mail and that the authorization will include two
pages. Accordingly, the Department estimates an annual cost burden of
approximately $2,312.\41\
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\41\ The material cost is estimated as: (52,449 IRA
authorizations x 5.8 percent paper) x [$0.66 + ($0.05 x 2)] =
$2,312.
Table 2--Material and Postage Cost Associated With the Written Authorization
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
Activity ---------------------------------------------------------------------------
Pages Cost Pages Cost
----------------------------------------------------------------------------------------------------------------
Material and Postage Cost........... 2 $2,312 2 $2,312
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[[Page 76017]]
Total........................... 2 2,312 2 2,312
----------------------------------------------------------------------------------------------------------------
1.2.2. Disclosure
Based on the estimates discussed above, the Department estimates
that approximately 3,006 financial institutions \42\ would continue to
utilize the exemption for exemptive relief for the transactions
described in Section III(a)-(f) for each plan and IRA. In total, the
Department estimates that 2,996 entities would prepare disclosures for
plans and 2,996 entities would prepare disclosures for IRAs. The
Department assumes that an in-house attorney will spend one hour of
legal staff time drafting the disclosure for plans and one hour of
legal staff time drafting the disclosure for IRAs. This results in an
hour burden of 5,992 hours with an equivalent cost of $954,765.\43\
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\42\ This includes 2,986 insurance agents and brokers, pension
consultants, and insurance companies and 20 investment company
underwriters servicing plans and IRAs.
\43\ The burden is estimated as: [2,996 financial institutions x
(1 hour for plans + 1 hour for IRAs)] = 5,992 hours. A labor rate of
approximately $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [2,996 financial
institutions x (1 hour for plans + 1 hour for IRAs)] x $159.34 per
hour = $954,765.
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The Department expects that the disclosures for plans would be
distributed through already established electronic means, and thus, the
Department does not expect plans to incur any cost to send the
disclosures. The Department expects that 94.2 percent of disclosures
for IRAs will be sent electronically at no additional burden. The
remaining 5.8 percent of authorizations will be mailed. For paper
copies, a clerical staff member is assumed to require two minutes to
prepare and mail the required information to the plan fiduciary. This
information will be sent to the 52,449 IRAs plus the 10 investment
company principal underwriters for IRAs entering into an agreement with
an insurance agent, pension consultant, or mutual fund principal
underwriter, and based on the above, the Department estimates that this
requirement results in an hour burden of 84 hours with an equivalent
cost of $6,435.\44\
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\44\ The burden is estimated as: {[(52,449 IRAs + 10 investment
company principal underwriters for IRAs) x 5.8 percent paper x 2
minutes] / 60 minutes = 101 hours. A labor rate of $63.45 is used
for a clerical worker. The labor rate is applied in the following
calculation: {[(52,449 IRAs + 10 investment company principal
underwriters for IRAs) x 5.8 percent paper x 2 minutes] / 60
minutes{time} x $63.45 = $6,435.
---------------------------------------------------------------------------
In total, as presented in the table below, providing the pre-
authorization materials is expected to impose an annual total hour
burden of 6,093 hours with an equivalent cost of $961,200.
Table 3--Hour Burden and Equivalent Cost Associated With the Disclosure
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 5,992 $954,765 5,992 $954,765
Clerical............................ 101 6,435 101 6,435
---------------------------------------------------------------------------
Total........................... 6,093 961,200 6,093 961,200
----------------------------------------------------------------------------------------------------------------
The Department assumes that this information will include seven
pages with 94.2 percent of disclosures distributed electronically
through traditional electronic methods at no additional burden, and the
remaining 5.8 percent of disclosures will be mailed. Accordingly, the
Department estimates an annual cost burden of approximately $2,313.\45\
---------------------------------------------------------------------------
\45\ The material cost is estimated as: [(52,449 IRA
authorizations + 10 investment company principal underwriters for
IRAs) x 5.8 percent paper] x [$0.66 + ($0.05 x 7)] = $2,313.
Table 4--Material and Postage Cost Associated With the Disclosure
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Equivalent burden Equivalent burden
Pages cost Pages cost
----------------------------------------------------------------------------------------------------------------
Material and Postage Cost........... 7 $2,313 7 $2,313
---------------------------------------------------------------------------
Total........................... 7 2,313 7 2,313
----------------------------------------------------------------------------------------------------------------
1.3 Costs Associated With Satisfying Conditions for Transactions
Described in Section III(g)
The amendment would provide investment advice fiduciaries with
relief for Independent Producers for transactions in which the
Independent Producer receives an insurance sales commission as a result
of the provision of investment advice, regarding the purchase of an
annuity contract of a financial institution that is not an Affiliate.
The Department expects that the financial institutions covered by this
proposal would be insurance companies that directly write annuities.
The proposed amendments outline conditions pertaining to disclosure,
[[Page 76018]]
policies and procedures, and retrospective reviews that need to be
satisfied to rely on the exemption. These conditions are tailored to
protect Retirement Investors from the specific conflicts that arise for
Independent Producers when providing investment advice to Retirement
Investors regarding the purchase of an annuity.
The Independent Insurance Agents and Brokers of America estimated
that there were 40,000 Independent Producers in 2022.\46\ The
Department does not have data on what percent of Independent Producers
service the retirement market. For the purposes of this analysis, the
Department assumes that 10 percent, or 4,000, of these Independent
Producers service the retirement market. The Department requests
comment on this assumption.
---------------------------------------------------------------------------
\46\ Annemarie McPherson Spears, 7 Findings From the 2022 Agency
Universe Study, (October 13, 2022), <a href="https://www.iamagazine.com/news/7-findings-from-the-2022-agency-universe-study?__hstc=79369803.5fd6a87d75ca95f942e9dc33fed281b9.1691447156981.1691447156981.1691447156981.1&__hssc=79369803.3.1691447156981&__hsfp=2180945085">https://www.iamagazine.com/news/7-findings-from-the-2022-agency-universe-study?__hstc=79369803.5fd6a87d75ca95f942e9dc33fed281b9.1691447156981.1691447156981.1691447156981.1&__hssc=79369803.3.1691447156981&__hsfp=2180945085</a>.
---------------------------------------------------------------------------
Insurance companies are primarily regulated by states and no single
regulator records a nationwide count of insurance companies. Although
state regulators track insurance companies, the total number of
insurance companies cannot be calculated by aggregating individual
state totals, because individual insurance companies often operate in
multiple states. In the Department's 2016 Regulatory Impact Analysis,
it estimated that 398 insurance companies wrote annuities.\47\ The
Department requests information on how the number of insurance
companies underwriting annuities has changed since then.
---------------------------------------------------------------------------
\47\ This estimate is based on 2014 data from SNL Financial on
life insurance companies reported receiving either individual or
group annuity considerations. (See Conflict of Interest Final Rule,
Regulatory Impact Analysis for Final Rule and Exemptions, U.S.
Department of Labor (April 2016), <a href="http://www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf">www.dol.gov/sites/dolgov/files/EBSA/laws-and-regulations/rules-and-regulations/completed-rulemaking/1210-AB32-2/ria.pdf</a>).
---------------------------------------------------------------------------
Some of these insurance companies may not sell any annuity
contracts in the IRA or plans. Because of these data limitations, the
Department includes all 398 insurance companies in its cost estimate,
though this likely represents an upper bound.
Insurance companies sell insurance products through (1) captive
insurance agents that work for an insurance company as employees or as
independent contractors who exclusively sell the insurance company's
products and (2) independent agents who sell multiple insurance
companies' products. In recent years, the market has seen a shift away
from captive distribution toward independent distribution.\48\
---------------------------------------------------------------------------
\48\ Ramnath Balasubramanian, Rajiv Dattani, Asheet Mehta, &
Andrew Reich, Unbundling Value: How Leading Insurers Identify
Competitive Advantage, McKinsey & Company, (June 2022), <a href="https://www.mckinsey.com/industries/financial-services/our-insights/unbundling-value-how-leading-insurers-identify-competitive-advantage">https://www.mckinsey.com/industries/financial-services/our-insights/unbundling-value-how-leading-insurers-identify-competitive-advantage</a>; Sheryl Moore, The Annuity Model Is Broken, Wink Intel,
(June 2022), <a href="https://www.winkintel.com/2022/06/the-annuity-model-is-broken-reprint/">https://www.winkintel.com/2022/06/the-annuity-model-is-broken-reprint/</a>.
---------------------------------------------------------------------------
The Department does not have data on the number of insurance
companies using captive agents or Independent Producers. Based on data
on the sales of individual annuities by distribution channel, the
Department estimates that approximately 46 percent of insurance
companies underwriting annuities sell annuities through captive
distribution channels, while 54 percent sell annuities through
independent distribution channels.\49\ For the purposes of this
analysis, the Department estimates that 215 insurance companies
distribute annuities through independent channels and would rely on PTE
84-24 for transactions involving investment advice.\50\
---------------------------------------------------------------------------
\49\ According to the Insurance Information Institute, in 2022,
20 percent of individual annuities were sold through independent
broker-dealers, 18 percent through independent agents, 15 percent
through career agents, 24 percent through banks, 17 percent through
full-service national broker-dealers, 3 percent through direct-
response, and 2 percent through other methods. For the purposes of
this analysis, the Department considers those sales made by career
agents and full-service national broker-dealers to be ``captive,''
and those made by independent broker-dealers and independent agents
to be ``independent.'' The Department assumes that 46 percent of
sales by banks are captive, while 54 percent of sales by banks are
independent. As such, the Department assumes that 46 percent of
sales are sold through captive channels {[15% + 17% + (46% x 24%)]/
(100%-6%){time} , while 54 percent of sales are sold through
independent channels {[20% + 18% + (54% x 24%)]/(100%-6%){time} .
\50\ The number of insurance companies using captive
distribution channels is estimated as (398 x 46%) = 183 insurance
companies. The number of insurance companies using independent
distribution channels is estimated as (398-183) = 215 insurance
companies.
---------------------------------------------------------------------------
The Department estimates that 70 of the 398 insurance companies are
large entities.\51\ For the purposes of this analysis, the Department
assumes the percent of small insurance companies using each
distribution channel is the same as for all insurance companies. That
is, the Department assumes that 46 percent of insurance companies (183
insurance companies) sell annuities through captive distribution
channels, of which 151 are estimated to be small insurance companies
and the remaining 32 large insurance companies.\52\ Additionally, 54
percent (215 insurance companies) sell annuities through independent
distribution channels, of which 177 are estimated to be small insurance
companies and the remaining 38 are large.\53\ The Department recognizes
that the distribution of sales by distribution channel is likely
different from the distribution of insurance companies by distribution
channel. The Department requests comment on how many insurance
companies sell annuities through captive and independent distribution
channels. The Department also requests comment on whether, or how many,
insurance companies may rely on both methods of distribution.
---------------------------------------------------------------------------
\51\ LIMRA estimates that, in 2016, 70 insurers had more than
$38.5 million in sales, which is the Small Business Administration's
threshold for a large entity within the insurance industry. (See
LIMRA, U.S. Individual Annuity Yearbook: 2016 Data, LIMRA Secure
Retirement Institute (2017)).
\52\ The number of large insurance companies using a captive
distribution channel is estimated as: (70 large insurance companies
x 46%) = 32 insurance companies. The number of small insurance
companies using a captive distribution channel is estimated as: (183
insurance companies--32 large insurance companies) = 151 small
insurance companies.
\53\ The number of large insurance companies using an
independent distribution channel is estimated as: (70 large
insurance companies x 54%) = 38 insurance companies. The number of
small insurance companies using an independent distribution channel
is estimated as: (215 insurance companies-38 large insurance
companies) = 177 small insurance companies.
---------------------------------------------------------------------------
1.3.1 Disclosures
As discussed above, the Department assumes that 4,000 Independent
Producers service the retirement market, selling the products of 215
insurance companies. For more generalized disclosures, the Department
assumes that insurance companies would prepare and provide disclosures
to Independent Producers selling their products. However, some of the
disclosures are tailored specifically to the Independent Producer. The
Department assumes that these disclosures would need to be prepared by
the Independent Producer themselves. The Department recognizes that
some may rely on intermediaries in the distribution channel to prepare
more specific disclosures; however, the Department expects that the
costs associated with the preparation would be covered by commissions
retained by the intermediary for its services.
1.3.1.1. Written Acknowledgement That the Independent Producer Is a
Fiduciary by the Independent Producer
The Department is including a model statement in the preamble to
PTE 84-24 that details what should be included in a fiduciary
acknowledgment for
[[Page 76019]]
financial institutions.\54\ The Department assumes that the time
associated with preparing the disclosures would be minimal. Further,
these disclosures are expected to be uniform in nature. Accordingly,
the Department estimates that these disclosures would not take a
significant amount of time to prepare.
---------------------------------------------------------------------------
\54\ 85 FR 82798, 82827 (Dec. 18, 2020). The model statement was
also included in Frequently Asked Questions in April 2021, New
Fiduciary Advice Exemption: PTE 2020-02 Improving Investment Advice
for Workers & Retirees Frequently Asked Questions, Q13, (April
2021), <a href="https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/faqs/new-fiduciary-advice-exemption.pdf</a>.
---------------------------------------------------------------------------
Due to the nature of Independent Producers, the Department assumes
that most financial institutions would make draft disclosures available
to Independent Producers pertaining to their fiduciary status. However,
the Department expects that a small percentage of Independent Producers
may draft their own disclosures. The Department assumes that an in-
house attorney for all 215 financial institutions as well as 5 percent
of Independent Producers, or 200 Independent Producers, would spend 10
minutes of legal staff time to produce a written acknowledgement in the
first year. This results in an estimated hour burden of approximately
69 with an equivalent cost of $11,021 in the first year.\55\
---------------------------------------------------------------------------
\55\ The burden is estimated as: {[(215 financial institutions +
200 Independent Producers) x (10 minutes)] / 60 minutes{time} = 69
hours. A labor rate of approximately $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: {[(215 financial institutions + 200 Independent
Producers) x (10 minutes)] / 60 minutes{time} x $159.34 = $11,021.
Table 5--Hour Burden and Equivalent Cost Associated With the Fiduciary Acknowledgement
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 69 $11,021 0 $0
---------------------------------------------------------------------------
Total........................... 69 11,021 0 0
----------------------------------------------------------------------------------------------------------------
1.3.1.2 Written Statement of the Best Interest Standard of Care Owed by
the Independent Producer
As discussed above, the Department assumes that 4,000 Independent
Producers service the retirement market, selling the products of 215
financial institutions. Due to the nature of Independent Producers, the
Department assumes that most financial institutions would make draft
disclosures available to Independent Producers, pertaining to the
annuities they offer. The Department assumes that an in-house attorney
for all 215 financial institutions as well as 5 percent of Independent
Producers, or 200 Independent Producers, would spend 30 minutes of
legal staff time to prepare the statement in the first year. This
results in an hour burden of 208 hours with an equivalent cost of
$33,063 in the first year.\56\
---------------------------------------------------------------------------
\56\ The burden is estimated as: {[(215 financial institutions +
200 Independent Producers) x (30 minutes)] / 60 minutes{time} = 208
hours. A labor rate of approximately $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: {[(215 financial institutions + 200 Independent
Producers) x (30 minutes)] / 60 minutes{time} x $159.34 = $33,063.
Table 6--Hour Burden and Equivalent Cost Associated With the Written Statement of the Best Interest Standard of
Care Owed
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 208 $33,063 0 $0
---------------------------------------------------------------------------
Total........................... 208 33,063 0 0
----------------------------------------------------------------------------------------------------------------
1.3.1.2. Written Description of the Services Provided and the Products
the Independent Producer Is Licensed and Authorized To Sell
As discussed above, the Department assumes that 4,000 Independent
Producers service the retirement market, selling the products of 215
insurance companies. For disclosures tailored more specifically to an
individual Independent Producer, the Department assumes that the
disclosure would need to be prepared by the Independent Producer. The
Department recognizes that many Independent Producers may not have the
internal resources to prepare such disclosure. The Department expects
that some may rely on intermediaries in the distribution channel to
prepare the disclosures and some may seek external legal support.
However, the Department expects that the costs associated with the
preparation would be covered by commission retained by the intermediary
for its services or by the fee paid to external legal support. As such,
the Department still attributes this cost back to the Independent
Producer. The Department requests comment on this assumption.
Accordingly, the Department assumes that all 4,000 Independent
Producers in this analysis would need to prepare the disclosure. The
Department assumes that, for each of these Independent Producers, an
attorney would spend 30 minutes of legal staff time drafting the
written description. This results in an hour burden of 2,000 hours with
an equivalent cost of $318,680 in the first year.\57\
---------------------------------------------------------------------------
\57\ The burden is estimated as: (4,000 Independent Producers x
0.5 hours) = 2,000 hours. A labor rate of approximately $159.34 is
used for a legal professional. The labor rate is applied in the
following calculation: (4,000 Independent Producers x 0.5 hours) x
$159.34 = $318,680.
[[Page 76020]]
Table 7--Hour Burden and Equivalent Cost Associated With the Written Description of Service Provided
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 2,000 $318,680 0 $0
---------------------------------------------------------------------------
Total........................... 2,000 318,680 0 0
----------------------------------------------------------------------------------------------------------------
1.3.1.4. A Written Statement of the Independent Producer's Material
Conflicts of Interest and the Amount of the Insurance Commission that
Would Be Paid to the Independent Producer in Connection With the
Purchase by a Retirement Investor of the Recommended Annuity
As discussed above, for disclosures tailored more specifically to
an individual Independent Producer, the Department assumes that the
disclosure would need to be prepared by the Independent Producer. The
Department recognizes that many Independent Producers may not have the
internal resources to prepare such disclosure, however they may already
have a similar statement to satisfy other legal requirements. The
Department expects that some may rely on intermediaries in the
distribution channel to prepare the disclosures and some may seek
external legal support. However, the Department expects that the costs
associated with the preparation would be covered by the commission
retained by the intermediary for its services or by the fee paid to
external legal support. As such, the Department still attributes this
cost back to the Independent Producer. The Department requests comment
on this assumption.
Accordingly, the Department assumes that all 4,000 Independent
Producers in this analysis would need to prepare the disclosure. The
Department assumes that, for each of these entities, an attorney would
spend one hour of legal staff time drafting the written description.
This results in an hour burden of 4,000 hours with an equivalent cost
of $637,360 in the first year.\58\
---------------------------------------------------------------------------
\58\ The burden is estimated as: (4,000 Independent Producers x
1 hour) = 4,000 hours. A labor rate of approximately $159.34 is used
for a legal professional. The labor rate is applied in the following
calculation: (4,000 hours x $159.34) = $637,360.
Table 8--Hour Burden and Equivalent Cost Associated With the Written Statement of the Independent Producer's
Material Conflicts of Interest
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 4,000 $637,360 0 $0
---------------------------------------------------------------------------
Total........................... 4,000 637,360 0 0
----------------------------------------------------------------------------------------------------------------
1.3.1.5 Before Recommending an Annuity, Engaging in a Rollover, or
Making a Recommendation to a Plan Participant as to the Post-Rollover
Investment of Assets Currently Held in a Plan, the Independent Producer
Must Document Its Conclusions as to Whether a Rollover Is in the
Investor's Best Interest
The proposed amendment would require an Independent Producer to
provide a disclosure to investors that documents their consideration as
to whether a recommended annuity or rollover is in the Retirement
Investor's best interest. Due to the nature of this disclosure, the
Department assumes that the content of the disclosure would need to be
prepared by the Independent Producer. The Department recognizes that
some may rely on intermediaries in the distribution channel, and some
may seek external legal support to assist with drafting the
disclosures. However, the Department expects that most Independent
Producers would prepare the disclosure themselves. The Department
requests comment on this assumption.
For the purposes of this analysis, the Department uses its estimate
for the number of new IRA accounts held by insurance companies as a
proxy for the number of Retirement Investors that have relationships
with Independent Producers that would engage in transactions covered
under the exemption. As such, the Department estimates that 52,449
Retirement Investors would receive documentation on whether the
recommended annuity is in their best interest each year. \59\
---------------------------------------------------------------------------
\59\ In 2020, 7 percent of traditional IRAs were held by
insurance companies. (See Investment Company Institute, The Role of
IRAs in US Households' Saving for Retirement, 2020, 27(1) ICI
Research Perspective (2021). <a href="https://www.ici.org/system/files/attachments/pdf/per27-01.pdf">https://www.ici.org/system/files/attachments/pdf/per27-01.pdf</a>.) This number has been adjusted
downward to 3 percent to reflect the removal of transactions not
covered by this exemption.). The number of IRAs affected is
estimated as: (83,252,750 IRAs x 2.1% IRAs assumed to be new IRAs x
3% of IRAs held by insurance companies) = 52,449 IRAs.
---------------------------------------------------------------------------
The Department assumes that, for each of these Retirement
Investors, an Independent Producer would spend one hour of a financial
manager's time drafting the documentation. This results in an estimated
hour burden of 52,449 hours with an equivalent cost of $8.3 million
annually.\60\
---------------------------------------------------------------------------
\60\ The burden is estimated as: (52,449 rollovers x 1 hour) =
52,449 hours. A labor rate of approximately $158.94 is used for an
Independent Producer. The labor rate is applied in the following
calculation: (52,449 rollovers x 1 hour) x $158.94 = $8,336,244.
[[Page 76021]]
Table 9--Hour Burden and Equivalent Cost Associated With the Rollover Documentation
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Insurance Sales Agent............... 52,449 $8,336,244 52,449 $8,336,244
---------------------------------------------------------------------------
Total........................... 52,449 8,336,244 52,449 8,336,244
----------------------------------------------------------------------------------------------------------------
1.3.1.6 Mailing Cost for Disclosures Sent From Independent Producers to
Retirement Investors
As discussed at the beginning of the cost section, The Department
assumes that 5.8 percent of disclosures would be mailed. Accordingly,
of the estimated 52,449 affected Retirement Investors, 3,042 Retirement
Investors are estimated to receive paper disclosures.\61\ For paper
copies, a clerical staff member is assumed to require five minutes to
prepare and mail the required information to the Retirement Investor.
This requirement results in an estimated hour burden of 254 hours with
an equivalent cost of $16,085.\62\
---------------------------------------------------------------------------
\61\ This is estimated as: (52,449 Retirement Investors x 5.8%)
= 3,042 paper disclosures.
\62\ This is estimated as: [(3,042 paper disclosures x 5
minutes) / 60 minutes] = 254 hours. A labor rate of $63.45 is used
for a clerical worker. The labor rate is applied in the following
calculation: [(3,042 paper disclosures x 5 minutes) / 60 minutes] x
$63.45 = $16,085.
Table 10--Hour Burden and Equivalent Cost Associated With Preparing the Disclosures
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Clerical............................ 254 $16,085 254 $16,085
---------------------------------------------------------------------------
Total........................... 254 16,085 254 16,085
----------------------------------------------------------------------------------------------------------------
The Department assumes that this information would include seven
pages, resulting in an annual cost burden for material and paper costs
of $3,072.\63\
---------------------------------------------------------------------------
\63\ This is estimated as: 3,042 rollovers resulting in a paper
disclosure x [$0.66 postage + ($0.05 per page x 7 pages)] = $3,072.
Table 11--Material Cost Associated With the Disclosures
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Pages cost Pages cost
----------------------------------------------------------------------------------------------------------------
Cost................................ 7 $3,072 7 $3,072
---------------------------------------------------------------------------
Total........................... 7 3,072 7 3,072
----------------------------------------------------------------------------------------------------------------
Additionally, Independent Producers would be required to send the
documentation to the insurance company. The Department expects that
such documentation would be sent electronically and result in a de
minimis burden. The Department requests comment on this assumption.
1.3.2 Policies and Procedures
1.3.2.1 Financial Institutions Must Establish, Maintain, and Enforce
Written Policies and Procedures for the Review of Each Recommendation
Before an Annuity Is Issued to a Retirement Investor, and the Financial
Institution Review Its Policies and Procedures at Least Annually
As discussed above, the Department estimates that 215 financial
institutions would need to meet this requirement, of which 177 are
estimated to be small and 38 are estimated to be large.\64\ The
Department assumes that, for each large insurance company, an in-house
attorney would spend 10 hours of legal staff time drafting the written
description, and for each small insurance company, an in-house attorney
would spend 5 hours of legal staff time. This results in an hour burden
of 1,265 hours with an equivalent cost of $201,565 in the first
year.\65\
---------------------------------------------------------------------------
\64\ The number of large insurance companies using an
independent distribution channel is estimated as: (70 large
insurance companies x 54%) = 38 insurance companies. The number of
small insurance companies using an independent distribution channel
is estimated as: (215 insurance companies-38 large insurance
companies) = 177 small insurance companies.
\65\ This is estimated as: [(177 small insurance companies x 5
hours) + (38 large insurance companies x 10 hours)] = 1,265 hours. A
labor rate of $159.34 is used for a legal professional. The labor
rate is applied in the following calculation: [(177 small insurance
companies x 5 hours) + (38 large insurance companies x 10 hours)] x
$159.34 = $201,565.
---------------------------------------------------------------------------
In the following years, the Department assumes for each insurance
company, an in-house attorney would spend two hours of legal staff time
reviewing the policies and procedures. This results in an hour burden
of 430 hours with an
[[Page 76022]]
equivalent cost of $68,516 in subsequent years.\66\
---------------------------------------------------------------------------
\66\ This is estimated as: (215 insurance companies x 2 hours) =
430 hours. A labor rate of $159.34 is used for a legal professional.
The labor rate is applied in the following calculation: (215
insurance companies x 2 hours) x $159.34 = $68,516.
---------------------------------------------------------------------------
The proposed amendments would also require financial institutions
to provide their complete policies and procedures to the Department
upon request. As discussed above for PTE 2020-02, the Department
estimates that it would request 165 policies and procedures in the
first year and 50 in subsequent years. Assuming that the number of
requests for the entities covered under PTE 2020-02 is equivalent to
the number of requests for the entities covered under PTE 84-24, the
Department assumes that it will request two policies and procedures
from insurers in the first year and one request in subsequent years, on
average.\67\ This results in an estimated cost of approximately $32 in
the first year \68\ and $16 in subsequent years.\69\
---------------------------------------------------------------------------
\67\ The number of requests in the first year is estimated as
215 insurance companies x (165 requests in PTE 2020-02/19,290
financial institutions in PTE 2020-02) = 2 requests. The number of
requests in subsequent years is estimated as: 215 insurance
companies x (50 requests in PTE 2020-02/19,290 financial
institutions in PTE 2020-02) = 1 request.
\68\ The burden is estimated as: [(2 x 15 minutes) / 60 minutes]
= 0.5 hours. A labor rate of $63.45 is used for a clerical worker.
The labor rate is applied in the following calculation: [(2 x 15
minutes) / 60 minutes] x $63.45 = $31.73.
\69\ The burden is estimated as: [(1 x 15 minutes) / 60 minutes]
= 0.25 hours. A labor rate of $63.45 is used for a clerical worker.
The labor rate is applied in the following calculation: [(1 x 15
minutes) / 60 minutes] x $63.45 = $15.86.
---------------------------------------------------------------------------
Insurers would also be required to review each of the Independent
Producer's recommendations before an annuity is issued to a Retirement
Investor to ensure compliance with the Impartial Conduct Standards and
other conditions of this exemption. This requirement is consistent with
the language in NAIC's 2010 Model Regulation 275, Suitability in
Annuity Transactions,\70\ and the 2020 revisions to Model Regulation
275, which expanded the suitability standard to a best interest
standard.\71\ Most states have adopted some form of the Model
Regulation 275.\72\ As such, the Department expects that reviewing
recommendations before an annuity is issued is common industry
practice. Accordingly, the Department expects that financial
institutions would incur a de minimis burden to comply with the
proposed amendments, when already complying with Model Regulation 275.
The Department requests comment on this assumption.
---------------------------------------------------------------------------
\70\ NAIC Model Suitability Regulations, Sec. 6(F)(1)(d)
(2010), <a href="https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201">https://naic.soutronglobal.net/Portal/Public/en-GB/RecordView/Index/25201</a>.
\71\ NAIC Model Suitability Regulations, Sec. 6(C)(1)(d)
(2020), <a href="https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf">https://content.naic.org/sites/default/files/inline-files/MDL-275.pdf</a>.
\72\ As of October of 2021, only three states had not adopted
some form of Model Regulation 275. (See A.D. Banker & Company,
Annuity Best Interest State Map and FAQs, (October 2021), <a href="https://blog.adbanker.com/annuity-best-interest-state-map-and-faqs">https://blog.adbanker.com/annuity-best-interest-state-map-and-faqs</a>).
Table 12--Hour Burden and Equivalent Cost Associated With Policies and Procedures
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 1,265 $201,565 430 $68,516
Clerical............................ 1 32 1 16
---------------------------------------------------------------------------
Total........................... 1,266 201,597 430 68,532
----------------------------------------------------------------------------------------------------------------
1.3.3. Retrospective Review
The proposed amendment would require financial institutions to
conduct a retrospective review at least annually. The review would be
required to be reasonably designed to prevent violations of and achieve
compliance with (1) the Impartial Conduct Standards, (2) the terms of
this exemption, and (3) the policies and procedures governing
compliance with the exemption. The review would be required to evaluate
the effectiveness of the supervision system, any noncompliance
discovered in connection with the review, and corrective actions taken
or recommended, if any. Financial institutions would also be required
to provide the Independent Producer with the underlying methodology and
results of the retrospective review.
1.3.3.1. The Insurance Company Must Conduct a Retrospective Review, at
Least Annually, for Each Independent Producer That Sells the Insurance
Company's Annuity Contracts
The Department estimates that 215 financial institutions would need
to meet this requirement. For this requirement the information
collection is documenting the findings of the retrospective review. The
Departments lacks data on, for a given insurance company, how many
Independent Producers, on average, sell their annuities. For the
purposes of this analysis, the Department assumes that, on average,
each Independent Producer sells the products of three financial
institutions. From each of these financial institutions, they may sell
multiple products. As such, the Department assumes that each year,
insurance companies would need to prepare a total of 12,000
retrospective reviews,\73\ or on average, each insurance company would
need to prepare approximately 56 retrospective reviews.\74\ The
Department requests comment on this estimate. The Department assumes
that, for each Independent Producer selling an insurance company's
products, an in-house attorney at the insurance company would spend one
hour of legal staff time, on average, drafting the retrospective
review. This results in an estimated hour burden of 12,000 hours with
an equivalent cost of $1.9 million.\75\
---------------------------------------------------------------------------
\73\ This is estimated as: (4,000 Independent Producers x 3
insurance companies covered) = 12,000 retrospective reviews.
\74\ This is estimated as: (12,000/215) = 55.81 retrospective
reviews, on average
\75\ This is estimated as: (12,000 retrospective reviews x 1
hour) = 12,000 hours. A labor rate of $159.34 is used for a legal
professional. The labor rate is applied in the following
calculation: (12,000 retrospective reviews x 1 hour) x $159.34 =
$1,912,080.
[[Page 76023]]
Table 13--Hour Burden and Equivalent Cost Associated With the Retrospective Review
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden Hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 12,000 $1,912,080 12,000 $1,912,080
---------------------------------------------------------------------------
Total........................... 12,000 1,912,080 12,000 1,912,080
----------------------------------------------------------------------------------------------------------------
1.3.3.2. Certification by the Senior Executive Officer of the Insurance
Company
The Department assumes it would take a Senior Executive Officer 15
minutes to certify the report. This results in an annual hour burden of
3,000 hours with an equivalent cost of $384,330.\76\
---------------------------------------------------------------------------
\76\ This is estimated as: [(12,000 retrospective reviews x 15
minutes) / 60 minutes] = 3,000 hours. A labor rate of $128.11 is
used for a Senior Executive Officer. The labor rate is applied in
the following calculation: [(12,000 retrospective reviews x 15
minutes) / 60 minutes] x $128.11 = $384,330.
Table 14--Hour Burden and Equivalent Cost Associated With the Certification by the Senior Executive Officer
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Senior Executive Officer............ 3,000 $384,330 3,000 $384,330
---------------------------------------------------------------------------
Total........................... 3,000 384,330 3,000 384,330
----------------------------------------------------------------------------------------------------------------
1.3.3.3. The Insurance Company Provides to the Independent Producer the
Methodology and Results of the Retrospective Review
The Department assumes that the insurance company would provide the
methodology and results electronically. The Department requests comment
on this assumption. The Department estimates that it would take
clerical staff five minutes to prepare and send each of the estimated
12,000 retrospective reviews. This results in an annual hour burden of
1,000 hours with an equivalent cost of $63,450.\77\ The Department
expects that the results would be provided electronically, thus the
Department does not expect there to be any material costs with
providing Independent Producers with the retrospective review.
---------------------------------------------------------------------------
\77\ This is estimated as: [(12,000 retrospective reviews x 5
minutes) / 60 minutes] = 1,000 hours. A labor rate of $63.45 is used
for a clerical worker. The labor rate is applied in the following
calculation: [(12,000 retrospective reviews x 5 minutes) / 60
minutes] x $63.45 = $63,450.
Table 15--Hour Burden and Equivalent Cost Associated With the Provision of the Results of the Retrospective
Review
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Clerical............................ 1,000 $63,450 1,000 $63,450
---------------------------------------------------------------------------
Total........................... 1,000 63,450 1,000 63,450
----------------------------------------------------------------------------------------------------------------
1.3.4. Recordkeeping Requirement
The proposed amendment would change the current recordkeeping
requirements to incorporate a new provision that is similar to the
recordkeeping provision in PTE 2020-02. This requirement would replace
the more limited existing recordkeeping requirement in current version
of PTE 84-24, which requires sufficient records to demonstrate that the
conditions of the exemption have been met. The Department does not have
data on how many pension consultants, insurance companies, and
investment company principal underwriters would continue to rely on PTE
84-24 as amended without also complying with the amended PTE 2020-02.
In this analysis, the Department assumes that all of the pension
consultants and investment company principal underwriters continuing to
rely on the amended PTE 84-24 would also rely on the amended PTE 2020-
02. Thus, to avoid double counting the compliance cost, this analysis
does not include the cost associated with the proposed recordkeeping
requirement for these entities.
[[Page 76024]]
For this analysis, the Department considers the cost for insurance
companies and Independent Producers complying with the proposed
recordkeeping requirements. The Department estimates that the
additional time needed to maintain records for the financial
institutions to be consistent with the exemption would take an
Independent Producer 2 hours, resulting in an hour burden of 8,430
hours and an equivalent cost of $1.3 million.\78\
---------------------------------------------------------------------------
\78\ This is estimated as: (4,000 Independent Producers + 215
insurance companies) x 2 hours = 8,430 hours. A labor rate of
$158.94 is used for an Independent Producer and a rate of $159.34
for an insurance company legal professional. The labor rate is
applied in the following calculation: [(4,000 Independent Producers
x 2 hours x $158.94) + (215 insurance companies x 2 hours x
$159.34)] = $1,340,036.
Table 16--Hour Burden and Equivalent Cost Associated With the Recordkeeping Requirement
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Legal............................... 8,430 $1,340,036 8,430 $1,340,036
---------------------------------------------------------------------------
Total........................... 8,430 1,340,036 8,430 1,340,036
----------------------------------------------------------------------------------------------------------------
For the purposes of this analysis, the Department assumes that, on
average, an Independent Producer would receive 10 requests per year and
that preparing and sending each request would take a legal
professional, on average, 30 minutes. Based on these assumptions, the
Department estimates that the proposed amendments would result in an
annual hour burden of 20,000 hours with an equivalent cost of
approximately $3.2 million.\79\ The Department requests comment on how
often financial institutions would receive requests for records and how
long the preparation of such records would take.
---------------------------------------------------------------------------
\79\ The burden is estimated as: {[(4,000 Independent Producers
x 10 requests) x 30 minutes] / 60 minutes{time} = 20,000 hours. A
labor rate of $158.94 is used for an Independent Producer. The labor
rate is applied in the following calculation: {[(4,000 Independent
Producers x 10 requests) x 30 minutes] / 60 minutes{time} x $158.94
= $3,178,800.
Table 17--Hour Burden and Equivalent Cost Associated With the Recordkeeping Requirement
----------------------------------------------------------------------------------------------------------------
Year 1 Subsequent years
---------------------------------------------------------------------------
Activity Equivalent burden Equivalent burden
Burden hours cost Burden hours cost
----------------------------------------------------------------------------------------------------------------
Independent Producer................ 20,000 $3,178,800 20,000 $3,178,800
---------------------------------------------------------------------------
Total........................... 20,000 3,178,800 20,000 3,178,800
----------------------------------------------------------------------------------------------------------------
1.4. Overall Summary
These paperwork burden estimates are summarized as follows:
Type of Review: Revision of an Existing Collection.
Agency: Employee Benefits Security Administration, Department of
Labor.
Title: Prohibited Transaction Exemption (PTE) 84-24 for Certain
Transactions Involving Insurance Agents and Brokers, Pension
Consultants, Insurance Companies, and Investment Company Principal
Underwriters.
OMB Control Number: 1210-0158.
Affected Public: Businesses or other for-profits; not for profit
institutions.
Estimated Number of Respondents: 7,221.
Estimated Number of Annual Responses: 119,376.
Frequency of Response: Initially, Annually, When engaging in
exempted transaction.
Estimated Total Annual Burden Hours: 123,726 hours.
Estimated Total Annual Burden Cost: $8,457.
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) \80\ imposes certain
requirements on rules subject to the notice and comment requirements of
section 553(b) of the Administrative Procedure Act or any other
law.\81\ Under section 603 of the RFA, agencies must submit an initial
regulatory flexibility analysis (IRFA) of a proposal that is likely to
have a significant economic impact on a substantial number of small
entities, such as small businesses, organizations, and governmental
jurisdictions. This proposed amended exemption, along with related
amended exemptions and a proposed rule amendment published elsewhere in
this issue of the Federal Register, is part of a rulemaking regarding
the definition of fiduciary investment advice, which the Department has
determined likely will have a significant economic impact on a
substantial number of small entities. The impact of this proposed
amendment on small entities is included in the IRFA for the entire
project, which can be found in the related notice of proposed
rulemaking found elsewhere in this edition of the Federal Register.
---------------------------------------------------------------------------
\80\ 5 U.S.C. 601 et seq.
\81\ 5 U.S.C. 601(2), 603(a); see also 5 U.S.C. 551.
---------------------------------------------------------------------------
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 \82\ requires
each federal agency to prepare a written statement assessing the
effects of any federal mandate in a proposed or final rule that may
result in an expenditure of $100 million or more (adjusted annually for
inflation with the base year 1995) in any 1 year by state, local, and
tribal governments, in the aggregate, or by the private sector. For
purposes of the Unfunded Mandates Reform Act, as well as Executive
Order 12875, this proposed amended exemption does not include any
Federal mandate that will result in such expenditures.
---------------------------------------------------------------------------
\82\ Public Law 104-4, 109 Stat. 48 (Jan. 4, 1995).
---------------------------------------------------------------------------
[[Page 76025]]
Federalism Statement
Executive Order 13132 outlines fundamental principles of
federalism. It also requires federal agencies to adhere to specific
criteria in formulating and implementing policies that have
``substantial direct effects'' on the states, the relationship between
the national government and states, or on the distribution of power and
responsibilities among the various levels of government. Federal
agencies promulgating regulations that have these federalism
implications must consult with State and local officials, and describe
the extent of their consultation and the nature of the concerns of
State and local officials in the preamble to the final regulation.
Notwithstanding this, ERISA section 514 provides, with certain
exceptions specifically enumerated, that the provisions of Titles I and
IV of ERISA supersede any and all laws of the States as they relate to
any employee benefit plan covered under ERISA.
The Department does not intend this exemption to change the scope
or effect of ERISA section 514, including the savings clause in ERISA
section 514(b)(2)(A) for State regulation of securities, banking, or
insurance laws. Ultimately, the Department does not believe this
proposed class exemption has federalism implications because it has no
substantial direct effect on the States, on the relationship between
the National government and the States, or on the distribution of power
and responsibilities among the various levels of government.
General Information
The attention of interested persons is directed to the following:
(1) The fact that a transaction is the subject of an exemption under
ERISA section 408(a) and Code section 4975(c)(2) does not relieve a
fiduciary, or other party in interest or disqualified person with
respect to a Plan, from certain other provisions of ERISA and the Code,
including any prohibited transaction provisions to which the exemption
does not apply and the general fiduciary responsibility provisions of
ERISA section 404 which require, among other things, that a fiduciary
act prudently and discharge his or her duties respecting the Plan
solely in the interests of the participants and beneficiaries of the
Plan. Additionally, the fact that a transaction is the subject of an
exemption does not affect the requirement of Code section 401(a) that
the Plan must operate for the exclusive benefit of the employees of the
employer maintaining the Plan and their beneficiaries; (2) Before the
proposed exemption may be granted under ERISA section 408(a) and Code
section 4975(c)(2), the Department must find that it 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 the Plan and IRA owners;
(3) If granted, the proposed exemption is applicable to a particular
transaction only if the transaction satisfies the conditions specified
in the exemption; and (4) The proposed exemption, if granted, is
supplemental to, and not in derogation of, any other provisions of
ERISA and the Code, including statutory or administrative exemptions
and transitional rules. Furthermore, the fact that a transaction is
subject to an administrative or statutory exemption is not dispositive
of whether the transaction is in fact a prohibited transaction.
The Department is proposing the following amendment on its own
motion, pursuant to its authority under ERISA section 408(a) and Code
section 4975(c)(2) and in accordance with procedures set forth in 29
CFR part 2570, subpart B (76 FR 66637 (October 27, 2011)).\83\
---------------------------------------------------------------------------
\83\ Reorganization Plan No. 4 of 1978 (5 U.S.C. App. 1 (2018))
generally transferred the authority of the Secretary of the Treasury
to grant administrative exemptions under Code section 4975 to the
Secretary of Labor.
---------------------------------------------------------------------------
Proposed Amendment to PTE 84-24
Section I--Retroactive Application
The restrictions of sections 406(a)(1)(A) through (D) and 406(b) of
the Act and the taxes imposed by section 4975 of the Code do not apply
to any of the transactions described in section III of this exemption
in connection with purchases made before November 1, 1977, if the
conditions set forth in section IV are met.
Section II--Prospective Application
(a) Except for fiduciaries providing investment advice within the
meaning of ERISA section 3(21)(A)(ii) or Code section 4975(e)(3)(B) and
regulations thereunder, the restrictions of section 406(a)(1)(A)
through (D) and 406(b) of the Act and the taxes imposed by section 4975
of the Code do not apply to any of the transactions described in
section III(a)-(f) of this exemption in connection with purchases made
after October 31, 1977, if the conditions set forth in sections IV, V
and IX are met.
(b) Effective on the date that is 60 days after the publication of
a final amendment in the Federal Register, the restrictions of ERISA
sections 406(a)(1)(D) and 406(b) and the taxes imposed by Code section
4975(a) and (b) by reason of Code sections 4975(c)(1)(E) and (F) for
fiduciaries providing investment advice within the meaning of ERISA
section 3(21)(A)(ii) or Code section 4975(e)(3)(B) and regulations
thereunder will not apply if the fiduciaries are Independent Producers,
the transactions meet the requirements described in Section III(g), the
conditions set forth in Sections VI, VII and IX are satisfied, and the
Independent Producer and Insurer are not ineligible under Section VIII.
Section III--Transactions
(a) The receipt, directly or indirectly, by an insurance agent or
broker or a pension consultant of a Mutual Fund Commission or an
Insurance Sales Commission from an insurance company in connection with
the purchase, with plan assets, of an insurance or annuity contract.
(b) The receipt of a Mutual Fund Commission by a Principal
Underwriter for an investment company registered under the Investment
Company Act of 1940 (hereinafter referred to as an investment company)
in connection with the purchase, with plan assets, of securities issued
by an investment company.
(c) The effecting by an insurance agent or broker, pension
consultant or investment company Principal Underwriter of a transaction
for the purchase, with plan assets, of an insurance or annuity contract
or securities issued by an investment company.
(d) The purchase, with plan assets, of an insurance or annuity
contract from an insurance company.
(e) The purchase, with plan assets, of an insurance or annuity
contract from an insurance company which is a fiduciary or a service
provider (or both) with respect to the plan solely by reason of the
sponsorship of a Pre-approved Plan.
(f) The purchase, with plan assets, of securities issued by an
investment company from, or the sale of such securities to, an
investment company or an investment company Principal Underwriter, when
such investment company, Principal Underwriter, or the investment
company investment adviser is a fiduciary or a service provider (or
both) with respect to the plan solely by reason of: (1) the sponsorship
of a Pre-approved plan; or (2) the provision of Nondiscretionary Trust
Services to the plan; or (3) both (1) and (2).
(g) The receipt, directly or indirectly, by an Independent Producer
of an Insurance Sales Commission as a result
[[Page 76026]]
of the provision of investment advice within the meaning of ERISA
section 3(21)(A)(ii) and Code section 4975(e)(3)(B), regarding the
purchase of a non-security annuity contract or other insurance product
not regulated by the Securities and Exchange Commission (SEC) of an
Insurer that is not an Affiliate, including as part of a rollover from
a Plan to an IRA as defined in Code section 4975(e)(1)(B) or (C).
Section IV--Conditions With Respect to Transactions Described in
Section III(a)-(f)
The following conditions apply solely to a transaction described in
Section III(a)-(f):
(a) The transaction is effected by the insurance agent or broker,
pension consultant, insurance company or investment company Principal
Underwriter in the ordinary course of its business as such a person.
(b) The transaction is on terms at least as favorable to the plan
as an arm's-length transaction with an unrelated party would be.
(c) The combined total of all fees, commissions and other
consideration received by the insurance agent or broker, pension
consultant, insurance company, or investment company Principal
Underwriter:
(1) For the provision of services to the plan; and
(2) In connection with the purchase of insurance or annuity
contracts or securities issued by an investment company is not in
excess of ``reasonable compensation'' within the contemplation of
section 408(b)(2) and 408(c)(2) of the Act and sections 4975(d)(2) and
4975(d)(10) of the Code. If such total is in excess of ``reasonable
compensation,'' the ``amount involved'' for purposes of the civil
penalties of section 502(i) of the Act and the excise taxes imposed by
section 4975(a) and (b) of the Code is the amount of compensation in
excess of ``reasonable compensation.''
Section V--Conditions for Transactions Described in Section III(a)
Through (d)
The following conditions apply solely to a transaction described in
subsections (a), (b), (c) or (d) of section III:
(a) The insurance agent or broker, pension consultant, insurance
company, or investment company Principal Underwriter is not
(1) a trustee of the plan (other than a Nondiscretionary Trustee
who does not render investment advice with respect to any assets of the
plan),
(2) a plan administrator (within the meaning of section 3(16)(A) of
the Act and section 414(g) of the Code),
(3) a fiduciary who is authorized to manage, acquire, or dispose of
the plan's assets on a discretionary basis, or
(4) for transactions described in sections III (a) through (d)
entered into after December 31, 1978, an employer any of whose
employees are covered by the plan.
Notwithstanding the above, an insurance agent or broker, pension
consultant, insurance company, or investment company Principal
Underwriter that is affiliated with a trustee or an investment manager
(within the meaning of section VI(b)) with respect to a plan may engage
in a transaction described in section III(a) through (d) of this
exemption on behalf of the plan if such trustee or investment manager
has no discretionary authority or control over the plan assets involved
in the transaction other than as a Nondiscretionary Trustee.
(b)(1) With respect to a transaction involving the purchase with
plan assets of an insurance or annuity contract or the receipt of an
Insurance Sales Commission thereon, the insurance agent or broker or
pension consultant provides to an independent fiduciary or IRA owner
with respect to the plan prior to the execution of the transaction the
following information in writing and in a form calculated to be
understood by a plan fiduciary who has no special expertise in
insurance or investment matters:
(A) If the agent, broker, or consultant is an affiliate of the
insurance company whose contract is being recommended, or if the
ability of such agent, broker or consultant to recommend insurance or
annuity contracts is limited by any agreement with such insurance
company, the nature of such affiliation, limitation, or relationship;
(B) The Insurance Sales Commission, expressed as a percentage of
gross annual premium payments for the first year and for each of the
succeeding renewal years, that will be paid by the insurance company to
the agent, broker or consultant in connection with the purchase of the
recommended contract; and
(C) For purchases made after June 30, 1979, a description of any
charges, fees, discounts, penalties or adjustments which may be imposed
under the recommended contract in connection with the purchase,
holding, exchange, termination or sale of such contract.
(2) Following the receipt of the information required to be
disclosed in subsection (b)(1), and prior to the execution of the
transaction, the independent fiduciary or IRA owner acknowledges in
writing receipt of such information and approves the transaction on
behalf of the plan. Such fiduciary may be an employer of employees
covered by the plan, but may not be an insurance agent or broker,
pension consultant or insurance company involved in the transaction.
Such fiduciary may not receive, directly or indirectly (e.g., through
an Affiliate), any compensation or other consideration for his or her
own personal account from any party dealing with the plan in connection
with the transaction.
(c)(1) With respect to a transaction involving the purchase with
plan assets of securities issued by an investment company or the
receipt of a Mutual Fund Commission thereon by an investment company
Principal Underwriter, the investment company Principal Underwriter
provides to an Independent fiduciary or IRA owner with respect to the
plan, prior to the execution of the transaction, the following
information in writing and in a form calculated to be understood by a
plan fiduciary who has no special expertise in insurance or investment
matters:
(A) If the person recommending securities issued by an investment
company is the Principal Underwriter of the investment company whose
securities are being recommended, the nature of such relationship and
of any limitation it places upon the Principal Underwriter's ability to
recommend investment company securities;
(B) The Mutual Fund Commission, expressed as a percentage of the
dollar amount of the plan's gross payment and of the amount actually
invested, that will be received by the Principal Underwriter in
connection with the purchase of the recommended securities issued by
the investment company; and
(C) For purchases made after December 31, 1978, a description of
any charges, fees, discounts, penalties, or adjustments which may be
imposed under the recommended securities in connection with the
purchase, holding, exchange, termination or sale of such securities.
(2) Following the receipt of the information required to be
disclosed in subsection (c)(1), and prior to the execution of the
transaction, the independent fiduciary or IRA owner approves the
transaction on behalf of the plan. Unless facts or circumstances would
indicate the contrary, such approval may be presumed if the fiduciary
or IRA owner permits the transaction to proceed after receipt of the
written disclosure. Such fiduciary may be an employer of employees
covered by the plan, but may not be a Principal Underwriter involved in
the
[[Page 76027]]
transaction. Such fiduciary may not receive, directly or indirectly
(e.g., through an affiliate), any compensation or other consideration
for his or her own personal account from any party dealing with the
plan in connection with the transaction.
(d) With respect to additional purchases of insurance or annuity
contracts or securities issued by an investment company, the written
disclosure required under subsections (b) and (c) of this section V
need not be repeated, unless--
(1) More than three years have passed since such disclosure was
made with respect to the same kind of contract or security, or
(2) The contract or security being recommended for purchase or the
commission with respect thereto is materially different from that for
which the approval described in subsections (b) and (c) of this section
was obtained.
Section VI--Conditions for Transactions Described in Section III(g)
The following conditions apply solely to a transaction described in
subsection (g) of section III:
(a) The Independent Producer is authorized to sell annuities from
two or more unrelated Insurers.
(b) The Independent Producer and the Insurer satisfy the applicable
conditions in Sections VII and IX and are not ineligible under Section
VIII. The Insurer will not necessarily become a fiduciary under ERISA
or the Code merely by complying with the exemption's conditions.
(c) Exclusions.
The relief in Section III(g) is not available if:
(1) The Plan is covered by Title I of ERISA and the Independent
Producer, Insurer, or any Affiliate is:
(A) the employer of employees covered by the Plan, or
(B) the Plan's named fiduciary or administrator; provided however
that a named fiduciary or administrator or their Affiliate may rely on
the exemption if it is selected to provide investment advice by a
fiduciary who:
(i) is not the Insurer, Independent Producer, or an Affiliate;
(ii) does not have a relationship to or an interest in the Insurer,
Independent Producer, or any Affiliate that might affect the exercise
of the fiduciary's best judgment in connection with transactions
covered by the exemption;
(iii) does not receive and is not projected to receive within the
current federal income tax year, compensation or other consideration
for their own account from the Insurer, Independent Producer, or an
Affiliate in excess of two (2) percent of the fiduciary's annual
revenues based upon its prior income tax year; or
(iv) is not the IRA owner or beneficiary; or
(2) The Independent Producer transaction involves the Independent
Producer and Insurer acting in a fiduciary capacity other than as an
investment advice fiduciary within the meaning of ERISA section
3(21)(A)(ii) and Code section 4975(e)(3)(B).
Section VII--Investment Advice Arrangement
Section VII(a) requires Independent Producers to comply with
Impartial Conduct Standards, including a Best Interest standard, when
providing fiduciary investment advice to Retirement Investors. Section
VII(b) requires Independent Producers to provide to Retirement
Investors a written acknowledgement that the Independent Producer is a
fiduciary under Title I of ERISA and/or the Code, a written statement
of the Best Interest standard of care, a written description of the
services they will provide and the products they are licensed and
authorized to sell, and a written statement of their material Conflicts
of Interest and the amount of the Insurance Commission that will be
paid to them in connection with the purchase of the recommended annuity
by a Retirement Investor. In addition, before the sale of a recommended
annuity, Independent Producers must consider and document their
conclusions as to whether the recommended annuity is in the Best
Interest of the Retirement Investor. Independent Producers recommending
a rollover must also provide additional disclosure as set forth in
subsection (b), below. Section VII(c) requires Insurers to adopt
policies and procedures prudently designed to ensure compliance with
the Impartial Conduct Standards and other conditions of this exemption.
Section VII(d) requires the Insurer to conduct a retrospective review,
at least annually, that is reasonably designed to detect and prevent
violations of, and achieve compliance with, the Impartial Conduct
Standards and the terms of this exemption. Section VII(e) allows
Independent Producers to correct certain violations of the exemption
conditions and maintain relief under the exemption. In complying with
this Section VII, the Independent Producer may reasonably rely on
factual representations from the Insurer, and Insurers may rely on
factual representations from the Independent Producer, as long as they
do not have knowledge that such factual representations are incomplete
or inaccurate.
(a) Impartial Conduct Standards
(1) The Independent Producer's investment advice is, at the time it
is provided, in the Retirement Investor's Best Interest. As defined in
Section X(b), advice is in the Retirement Investor's Best Interest if
it (A) reflects the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent person acting in a like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, based on the
investment objectives, risk tolerance, financial circumstances, and
needs of the Retirement Investor, and (B) does not place the financial
or other interests of the Independent Producer, Insurer or any
Affiliate, Related Entity, or other party ahead of the Retirement
Investor's interests, or subordinate the Retirement Investor's
interests to those of the Independent Producer, Insurer or any
Affiliate, Related Entity, or other party. For example, in choosing
between annuity products offered by Insurers, whose products the
Independent Producer is authorized to sell, it is not permissible for
the Independent Producer to recommend a product that is worse for the
Retirement Investor, but better or more profitable for the Independent
Producer or the Insurer;
(2) The Independent Producer receives no compensation in connection
with the transaction other than the Insurance Sales Commission, and the
Insurance Sales Commission does not exceed reasonable compensation
within the meaning of ERISA section 408(b)(2) and Code section
4975(d)(2); and
(3) The Independent Producer's statements to the Retirement
Investor about the recommended transaction and other relevant matters
are not, at the time the statements are made, materially misleading.
For purposes of this subsection, the term ``materially misleading''
includes omitting information that is needed to make the statement not
misleading in light of the circumstances under which it was made.
(b) Disclosure
Prior to engaging in a transaction described in Section III(g), the
Independent Producer provides the disclosures set forth in paragraphs
(1)-(5) to the Retirement Investor:
(1) A written acknowledgment that the Independent Producer is a
fiduciary under Title I and the Code, as applicable, with respect to
any investment recommendation provided
[[Page 76028]]
by the Independent Producer to the Retirement Investor;
(2) A written statement of the Best Interest standard of care owed
by the Independent Producer to the Retirement Investor;
(3) A written description of the services to be provided and the
Independent Producer's material Conflicts of Interest that is accurate
and not misleading in any material respects. The description will
include the products the Independent Producer is licensed and
authorized to sell. The description must inform the Retirement Investor
in writing of any limits on the range of insurance products
recommended. The Independent Producer must identify the specific
Insurers and specific insurance products available for recommendation.
(4) A written statement of the amount of the Insurance Commission
that will be paid to the Independent Producer in connection with the
purchase by a Retirement Investor of the recommended annuity. The
statement must disclose the amount of expected Insurance Sales
Commission, expressed both in dollars and as a percentage of gross
annual premium payments, if applicable, for the first year and for each
of the succeeding years.
(5) A written statement that the Retirement Investor has the right
to obtain specific information regarding costs, fees, and compensation,
described in dollar amounts, percentages, formulas, or other means
reasonably designed to present materially accurate disclosure of their
scope, magnitude, nature with in sufficient detail to permit the
Retirement Investor to make an informed judgment about the costs of the
transaction and about the significance and severity of the Conflicts of
Interest, and describe how the Retirement Investor can get the
information, free of charge.
(6) Before the sale of a recommended annuity, the Independent
Producer considers and documents its conclusions as to whether the
recommended annuity is in the Best Interest of the Retirement Investor
and provides that documentation to both the Retirement Investor and to
the Insurer;
(7) Rollover disclosure. Before engaging in a rollover or making a
recommendation to a Plan participant as to the post-rollover investment
of assets currently held in a Plan, the Independent Producer must
consider and document its conclusions as to whether a rollover is in
the Retirement Investor's Best Interest and provide that documentation
to both the Retirement Investor and to Insurer. Relevant factors to
consider must include to the extent applicable, but in any event are
not limited to:
(A) the alternatives to a rollover, including leaving the money in
the Plan, if applicable;
(B) the comparative fees and expenses;
(C) whether an employer or other party pays for some or all
administrative expenses; and
(D) the different levels of fiduciary protection, services, and
investments available.
(6) Independent Producers and Insurers may rely in good faith on
information and assurances from the other entities that are not
Affiliates as long as they do not know (or have a reason to know) that
such information is incomplete or inaccurate.
(8) The Independent Producer is not required to disclose
information pursuant to this Section VII(b) if such disclosure is
otherwise prohibited by law.
(c) Policies and Procedures
(1) The Insurer establishes, maintains, and enforces written
policies and procedures for the review of each recommendation before an
annuity is issued to a Retirement Investor pursuant to an Independent
Producer's recommendation that are prudently designed to ensure
compliance with the Impartial Conduct Standards and other exemption
conditions. The Insurer's prudent review of the Independent Producer's
specific recommendations must be made without regard to the Insurer's
own interests. An Insurer is not required to supervise an Independent
Producer's recommendations to Retirement Investors of products other
than annuities offered by the Insurer.
(2) The Insurer's policies and procedures mitigate Conflicts of
Interest to the extent that a reasonable person reviewing the policies
and procedures and incentive practices as a whole would conclude that
they do not create an incentive for the Independent Producer to place
its interests, or those of the Insurer, or any Affiliate or Related
Entity, ahead of the interests of the Retirement Investor. The
Insurer's procedures identify and eliminate quotas, appraisals,
performance or personnel actions, bonuses, contests, special awards,
differential compensation, or other similar actions or incentives that
are intended, or that a reasonable person would conclude are likely, to
result in recommendations that are not in the Retirement Investor's
Best Interest, or that subordinate the interests of the Retirement
Investor to the Independent Producer's own interests, or those of the
Insurer, or to make recommendations based on the Independent Producer's
considerations of factors or interests other than the investment
objectives, risk tolerance, financial circumstances, and needs of the
Retirement Investor.
(3) The Insurer's policies and procedures include a prudent process
for determining whether to authorize an Independent Producer to sell
the Insurer's annuity contracts to Retirement Investors, and for taking
action to protect Retirement Investors from Independent Producers who
have failed or are likely to fail to adhere to the Impartial Conduct
Standards, or who lack the necessary education, training, or skill. A
prudent process includes careful review of customer complaints,
disciplinary history, and regulatory actions concerning the Independent
Producer, as well as the Insurer's review of the Independent Producer's
training, education, and conduct with respect to the Insurer's own
products. The Insurer must document the basis for its initial
determination that it can rely on the Independent Producer to adhere to
the Impartial Conduct Standards, and must review that determination at
least annually as part of the retrospective review set forth in
subsection (d) below.
(4) Insurers must provide their complete policies and procedures to
the Department within 10 business days of request.
(d) Retrospective Review
(1) The Insurer conducts a retrospective review, at least annually,
that is reasonably designed to detect and prevent violations of, and
achieve compliance with the conditions of the exemption, including the
Impartial Conduct Standards, and the policies and procedures governing
compliance with the exemption, including the effectiveness of the
supervision system, the exceptions found, and corrective action taken
or recommended, if any. The retrospective review must also include a
review of Independent Producers' rollover recommendations and the
required rollover disclosure. As part of this review, the Insurer must
prudently determine whether to continue to permit individual
Independent Producers to sell the Insurer's annuity contracts to
Retirement Investors. Additionally, the Insurer updates the policies
and procedures as business, regulatory, and legislative changes and
events dictate, and to ensure they remain prudently designed,
effective, and compliant with Section VII(c).
[[Page 76029]]
(2) The Insurer annually provides a written report to a Senior
Executive Officer which details the review.
(3) The Insurer provides to the Independent Producer the
methodology and results of the retrospective review;
(4) A Senior Executive Officer of the Insurer certifies, annually,
that:
(A) The officer has reviewed the report of the retrospective review
report;
(B) The Insurer has filed (or will file timely, including
extensions) Form 5330 reporting any non-exempt prohibited transaction
discovered by the Insurer in connection with investment advice covered
under Code section 4975(e)(3)(B), advised the Independent Producer of
the violation and any resulting excise taxes owed under Code section
4975, and notified the Department of Labor of the violation via email
to <a href="/cdn-cgi/l/email-protection#6d3d3928325559405f592d090201430a021b"><span class="__cf_email__" data-cfemail="247470617b1c1009161064404b480a434b52">[email protected]</span></a>.
(C) The Insurer has established policies and procedures prudently
designed to ensure that Independent Producers achieve compliance with
the conditions of this exemption, and has updated and modified the
policies and procedures as appropriate after consideration of the
findings in the retrospective review report; and
(D) The Insurer has in place a prudent process to modify such
policies and procedures as set forth in Section II(d)(1).
(5) The review, report, and certification are completed no later
than six months following the end of the period covered by the review.
(6) The Insurer retains the report, certification, and supporting
data for a period of six years and makes the report, certification, and
supporting data available to the Department, within 10 business days of
request, to the extent permitted by law.
(e) Self-Correcti
[…truncated; see source link]Indexed from Federal Register on November 3, 2023.
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