Rule2024-08067
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
April 25, 2024
Effective
September 23, 2024
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
This document contains a notice of 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 affects 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 89 Issue 81 (Thursday, April 25, 2024)</title>
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[Federal Register Volume 89, Number 81 (Thursday, April 25, 2024)]
[Rules and Regulations]
[Pages 32302-32344]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-08067]
[[Page 32301]]
Vol. 89
Thursday,
No. 81
April 25, 2024
Part VI
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Amendment to Prohibited Transaction Exemption 84-24; Final Rule
Federal Register / Vol. 89, No. 81 / Thursday, April 25, 2024 / Rules
and Regulations
[[Page 32302]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
[Application No. D-12060]
ZRIN 1210-ZA33
Amendment to Prohibited Transaction Exemption 84-24
AGENCY: Employee Benefits Security Administration, U.S. Department of
Labor.
ACTION: Amendment to Prohibited Transaction Exemption 84-24.
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SUMMARY: This document contains a notice of 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 affects participants and beneficiaries of plans, individual
retirement account (IRA) owners, and certain fiduciaries of plans and
IRAs.
DATES: The amendment is effective September 23, 2024.
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:
Background
The Employee Retirement Income Security Act of 1974 (ERISA)
provides, in relevant part, that a person is a fiduciary with respect
to a plan to the extent they render investment advice for a fee or
other compensation, direct or indirect, with respect to any moneys or
other property of such plan, or has any authority or responsibility to
do so. Title I of the ERISA (referred to herein as Title I), which
generally applies to employer-sponsored plans, includes this provision
in ERISA section 3(21)(A)(ii).\1\ ERISA's Title II (referred to herein
as the Code), includes a parallel provision in Code section
4975(e)(3)(B), which defines a fiduciary of a tax-qualified plan,
including individual retirement accounts (IRAs).
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\1\ Section 3(21)(A)(ii) of the Act is codified at 29 U.S.C.
1002(3)(21)(A)(ii). As noted above, Title I of the Act was codified
in Title 29 of the U.S. Code. As a matter of practice, this preamble
refers to the codified provisions in Title I by reference to the
sections of ERISA, as amended, and not by its numbering in the U.S.
Code.
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In addition to fiduciary obligations, ERISA and the Code
``categorically bar[]'' plan fiduciaries from engaging in transactions
deemed ``likely to injure the pension plan.'' \2\ These prohibitions
broadly forbid a fiduciary from ``deal[ing] with the assets of the plan
in his own interest or for his own account,'' and ``receiv[ing] any
consideration for his own personal account from any party dealing with
such plan in connection with a transaction involving the assets of the
plan.'' \3\ Congress also gave the Department of Labor (the Department)
authority to grant conditional administrative exemptions from the
prohibited transaction provisions, but only if the Department finds
that the exemption is (1) administratively feasible for the Department,
(2) in the interests of the plan and of its participants and
beneficiaries, and (3) protective of the rights of participants and
beneficiaries of such plan.\4\
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\2\ Harris Trust Sav. Bank v. Salomon Smith Barney Inc., 530
U.S. 238, 241-42 (2000) (citation and quotation marks omitted).
\3\ ERISA section 406(b)(1), (3), 29 U.S.C. 1106(b)(1), (3).
\4\ ERISA section 408(a), 29 U.S.C. 1108(a). Under the
Reorganization Plan No. 4 of 1978, which Congress subsequently
ratified in 1984, Sec. 1, Public Law 98-532, 98 Stat. 2705 (Oct. 19,
1984), Congress generally granted the Department authority to
interpret the fiduciary definition and issue administrative
exemptions from the prohibited transaction provisions in Code
section 4975. 5 U.S.C. App. (2018).
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On October 31, 2023, the Department released the proposed
Retirement Security Rule: Definition of an Investment Advice Fiduciary,
along with proposed amendments to PTE 2020-02 and other administrative
prohibited transaction exemptions available to investment advice
fiduciaries.\5\ The proposed rule was designed to ensure that the
protections established by Titles I and II of ERISA would uniformly
apply to all advice that Retirement Investors (receive concerning
investment of their retirement assets in a way that ensures that
Retirement Investors' reasonable expectations are honored when they
receive advice from financial professionals who hold themselves out as
trusted advice providers (Retirement Investors are defined to include
Plans, Plan participants and beneficiaries, IRAs, IRA owners and
beneficiaries, Plan fiduciaries within the meaning of ERISA section
(3)(21)(A)(i) or (iii) and Code section 4975(e)(3)(A) or (C) with
respect to the Plan, or IRA fiduciaries within the meaning of Code
section 4975(e)(3)(A) or (C) with respect to the IRA).
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\5\ The proposals were released on the Department's website on
October 31, 2023. They were published in the Federal Register on
November 3, 2023, at 88 FR 75890, 88 FR 75979, 88 FR 76004, and 88
FR 76032.
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At the same time, the Department released the proposed amendment to
PTE 84-24 (the Proposed Amendment) and invited all interested persons
to submit written comments.\6\ The Department also proposed amendments
to PTEs 75-1, 77-4, 80-83, 83-1, 86-128, and 2020-02.
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\6\ The Proposed Amendment was released on October 31, 2023, and
was published in the Federal Register on November 3, 2023. 88 FR
75979.
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The Department received written comments on the Proposed Amendment,
and on December 12 and 13, 2023, held a virtual public hearing at which
witnesses provided commentary on the Proposed Amendment. After
carefully considering the comments it received and the testimony
presented at the hearing, including representations Insurers have made
to the Department regarding impediments they have confronted in
complying with the current conditions of PTE 2020-02 when distributing
annuities through independent agents (Independent Producers), the
Department is granting this amendment to PTE 84-24 as provided herein
(the ``Final Amendment'') on its own motion pursuant to its authority
under ERISA section 408(a) and Code section 4975(c)(2) and in
accordance with its exemption procedures set forth in 29 CFR part 2570,
subpart B (76 FR 66637 (October 27, 2011)).\7\ Elsewhere in this
edition of the Federal Register, the Department is finalizing (1) its
proposed rule 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 ERISA section 3(21)(A)(ii) and
Code section 4975(e)(3)(B) (the ``Regulation''), and (2) amendments to
several existing prohibited transaction exemptions (PTEs)--namely PTEs
75-1, 77-4, 80-83, 83-1, 86-128, and 2020-02--that apply to the
provision of fiduciary investment advice.
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\7\ 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. Procedures Governing the Filing and Processing
of Prohibited Transaction Exemption Applications were amended
effective April 8, 2024 (29 CFR part 2570, subpart B (89 FR 4662
(January 24, 2024)).
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PTE 2020-02
As described elsewhere in this edition of the Federal Register, the
Department is also adopting amendments to PTE 2020-02. That exemption
remains
[[Page 32303]]
generally available for all investment advice, including
recommendations of insurance products. The Department maintains its
long-held position that insurance companies can effectively exercise
fiduciary oversight with respect to Independent Producers'
recommendations of the insurance company's own products under PTE 2020-
02. PTE 2020-02 offers 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 Producers. As fully discussed below,
however, the Department is amending PTE 84-24 to provide a specially
tailored, alternative exemption allowing an Independent Producer to
receive commissions from an insurance company with respect to annuity
recommendations of the insurance company's products.
Comments and Overview of the Amendment to PTE 84-24
Overview of Amended Exemption
The Department is amending PTE 84-24 to exclude sales and
compensation received as a result of providing investment advice within
the meaning of ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B) and regulations thereunder from the existing relief
provided in Section II, which the Department has redesignated as
Section II(a). The amendment adds new Section II(b), which provides
relief from the restrictions of ERISA sections 406(a)(1)(A), (D) and
406(b) and the taxes imposed by Code section 4975(a) and (b) by reason
of Code sections 4975(c)(1)(A), (D), (E) and (F) for Independent
Producers that provide fiduciary investment advice and engage in the
following transactions, including as part of a rollover, as a result of
providing investment advice within the meaning of ERISA section
3(21)(A)(ii) and Code section 4975(e)(3)(B) and regulations thereunder:
(1) The receipt, directly or indirectly, by an Independent Producer
of reasonable compensation; and
(2) the sale of a non-security annuity contract or other insurance
product that does not meet the definition of ``security'' under Federal
securities laws.
The exemption is subject to certain conditions. These conditions
are similar to the conditions contained in amended PTE 2020-02, but the
Department has tailored the conditions to protect Retirement Investors
from the specific conflicts that can arise when Independent Producers
that are compensated through commissions and other compensation provide
investment advice to Retirement Investors regarding the purchase of an
annuity. The amended exemption includes an eligibility provision in
Section VIII for investment advice transactions and a new recordkeeping
condition in Section IX that is similar to the recordkeeping provision
in PTE 2020-02.
The Department's Role Related to the Sale of Insurance Products to
Retirement Investors
Several commenters raised concerns with the Department's approach
to amending PTE 84-24 and insurance recommendations more generally.
Some commenters argued that the Federal Government should not be
regulating the sales of insurance products. They argued that the
McCarran-Ferguson Act assigns to the States, not the Federal
Government, primary authority to regulate the business of insurance.
Furthermore, several commenters pointed out that many States have
adopted the 2020 National Association of Insurance Commissioners (NAIC)
Suitability In Annuity Transactions Model Regulation 275 (the NAIC
Model Regulation), which imposes a ``best interest'' standard on
insurance producers. Some commenters argued that the Department should
rely entirely on the NAIC Model Regulation instead of relying on the
specific standards in ERISA and the Code.
However, many of these same commenters also noted that Insurers
have long relied on the relief provided in PTE 84-24, thereby
implicitly acknowledging that the Department has long regulated the
business of insurance with respect to the sale of insurance products to
Retirement Investors. ERISA and the Code broadly regulate Plan and IRA
investments, including investments in insurance. As the Supreme Court
held in Hancock v. Harris Trust,\8\ Congress enacted ERISA with the
broad purpose of protecting retirement benefits, including benefits
supported by insurance contracts. During the more than 45 years that
has passed since the Department issued PTE 77-9, the predecessor to PTE
84-24, it has consistently imposed conditions on insurance companies
and agents receiving commissions and other compensation that would
otherwise be prohibited under ERISA. Indeed, the interaction between
the NAIC Model Regulation and the fiduciary protections under Title I
and Title II of ERISA is explicitly recognized in the NAIC Model
Regulation's safe harbor, which provides that recommendations and sales
of annuities in compliance with comparable standards to the NAIC Model
Regulation satisfy its requirements, including those applicable to
fiduciaries under ERISA section 3(21) and Code section 4975(e)(3).\9\
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\8\ See John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav.
Bank, 510 U.S. 86, 96 (1993) (noting ERISA's ``broadly protective
purposes'' regarding retirement benefits and that fiduciary status
applies to ``persons whose actions affect the amount of benefits
retirement plan participants will receive'').
\9\ NAIC Model Regulation at section 6.E.4.c.
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In recent years, many States have increased investor protections
with respect to recommendations to purchase annuities. These increased
protections reflect a recognition by the States of the increased
importance of ensuring that investors receive sound investment advice,
as insurance products have grown in complexity and individuals have
increasingly become dependent upon receiving sound advice from
investment professionals, including insurance agents. The amendments to
this exemption and related amendments to PTE 2020-02 supplement those
State-law protections by ensuring that trusted professionals'
recommendations of insurance products to Retirement Investors are
subject to the same stringent standards of conduct that apply to
recommendations of other investment products.
Titles I and II of ERISA reflect a strong Federal interest in the
regulation and protection of retirement investments and Retirement
Investors. Critical to this Federal regulatory system are the
prohibited transaction provisions, which preclude fiduciaries from
engaging in a wide range of conflicted transactions with Retirement
Investors, unless there is an applicable statutory exemption or the
Department grants an administrative exemption with protective
conditions carefully designed to protect Retirement Investors from
injury associated with unregulated conflicts of interest. As compared
to State insurance law, ERISA and the Code place greater emphasis on
the stringent regulation of conflicts of interest and impose fiduciary
obligations on persons who engage in important activities related to
investment management or advice. PTE 84-24, together with PTE 2020-02,
reflects the Department's independent statutory authority and
obligation under ERISA section 408(a) and Code section 4975(c)(2) to
ensure that it only grants exemptive relief for prohibited transactions
that is protective of the rights of plan participants and
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beneficiaries and in their interests. The Department is finalizing this
amendment consistent with its statutory obligation.
Taken together, amended PTE 84-24 and PTE 2020-02 ensure that when
trusted advisers,\10\ including Independent Producers, recommend
insurance products to Retirement Investors, they will adhere to
fundamental standards of fiduciary conduct subject to supervision by a
responsible financial institution. Under the core standards of both
amended exemptions investment professionals advice must:
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\10\ When using the term ``adviser,'' the Department does not
refer only to investment advisers registered under the Investment
Advisers Act of 1940 or under state law, but rather to any person
rendering fiduciary investment advice under the Regulation. For
example, as used herein, an adviser can be an individual who is,
among other things, a representative of a registered investment
adviser, a bank or similar financial institution, an insurance
company, or a broker-dealer.
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<bullet> acknowledge their fiduciary status \11\ in writing to the
Retirement Investor;
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\11\ For purposes of this disclosure, and throughout the
exemption, the term ``fiduciary status'' is limited to fiduciary
status under Title I of ERISA, the Code, or both. While this
exemption uses some of the same terms that are used in the SEC's
Regulation Best Interest and/or in the Investment Advisers Act of
1940 and related interpretive materials issued by the SEC or its
staff, the Department retains interpretive authority with respect to
satisfaction of this exemption.
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<bullet> disclose their services and material conflicts of interest
to the Retirement Investor;
<bullet> adhere to Impartial Conduct Standards requiring them to:
[cir] investigate and evaluate investments, provide advice, and
exercise sound judgment in the same way that knowledgeable and
impartial professionals would in similar circumstances (the ``Care
Obligation'');
[cir] never place their own interests ahead of the Retirement
Investor's interest or subordinate the Retirement Investor's interests
to their own (the ``Loyalty Obligation'');
[cir] charge no more than reasonable compensation and, if
applicable, comply with Federal securities laws regarding ``best
execution''; and
[cir] avoid making misleading statements about investment
transactions and other relevant matters;
<bullet> adopt firm-level policies and procedures prudently
designed to ensure compliance with the Impartial Conduct Standards and
mitigate conflicts of interest that could otherwise cause violations of
those standards;
<bullet> document and disclose the specific reasons for any
rollover recommendations; and
<bullet> conduct an annual retrospective compliance review.
As discussed in greater detail below, the Department has concluded
that amended PTEs 84-24 and 2020-02 flexible and workable exemptions
that provide a sound and uniform framework for financial institutions
and investment professionals to provide fiduciary investment advice to
Retirement Investors. Taken together, these amended exemptions are
broadly available for fiduciary investment advice, without regard to
business model, fee structure, or type of product recommended, subject
to financial institutions' and investment professionals' compliance
with the fundamental standards for the protection of Retirement
Investors set forth above. To the extent the terms of the exemptions
are honored, Retirement Investors will benefit from the application of
a common standard, applicable to all fiduciary recommendations to
Retirement Investors, that ensures prudent and loyal investment
recommendations from fiduciary investment advice providers competing on
a level playing field that is protective of Retirement Investors. The
chief difference between amended PTEs 2020-02 and 84-24, as discussed
below, is that the Department amended PTE 84-24 to provide a pathway to
compliance with the prohibited transaction rules for Independent
Producers who recommend the products of multiple Insurers to Retirement
Investors, without requiring those Insurers to assume or acknowledge
their fiduciary status under ERISA and the Code.
Applicability Date
This Final Amendment is applicable to transactions pursuant to
investment advice provided on or after September 23, 2024 (the
``Applicability Date''). For transactions pursuant to investment advice
provided before the Applicability Date, the prior version of PTE 84-24
will remain available for all insurance agents and insurance companies
that currently rely on the exemption.\12\ Also, no party would be held
to the amended conditions in Sections VII, VIII, IX or XI for a
transaction that occurred before the Applicability Date of the amended
exemption.
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\12\ To the extent a party receives ongoing compensation for a
recommendation that was made before the Applicability Date,
including through a systematic purchase payment or trailing
commission, the amended PTE 84-24 would not apply unless and until
new investment advice is provided.
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Several commenters stated that the Proposed Amendment's
Applicability Date, which was set for 60 days after publication, did
not provide sufficient time for parties to fully comply with the new
conditions for receipt of reasonable compensation for investment
advice. In response to these comments, the Department is adding a new
Section XI, which provides a phase-in period for the one-year period
beginning September 23, 2024. Thus, an Independent Producer may receive
compensation under Section II(b) during the phase-in period if it
complies with the Impartial Conduct Standards condition in Section
VII(a) and the fiduciary acknowledgment condition under Section
VII(b)(1). This one-year phase-in period is the same as the one-year
compliance period the Department provided when it originally granted
PTE 2020-02.
Excluding Investment Advice
The amended PTE 84-24 excludes sales and compensation received as a
result of the provision of investment advice from relief for the
transactions described in Section III(a) through (f) of the exemption.
However, relief remains available under those provisions for non-advice
transactions. Investment advice fiduciaries must comply with the
conditions in Sections VI-VIII that are tailored specifically for
investment advice transactions. For clarity, the Department has
included this limitation in each subsection of Section III(a) through
(f) by adding the phrase ``if the sales commission is not received as a
result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) (and the
regulations issued thereunder)'' to the end of each subsection in
Section III(a) through (f). The Department also is revising the
disclosure conditions in Section V to reflect that these sections are
not available for the receipt of compensation as a result of the
provision of fiduciary investment advice.
The Department notes that many types of fiduciaries are already
excluded from the transactions in Sections III(a)-(d) of PTE 84-24.
After the Applicability Date of the Final Amendment, the relief
provided in these sections would remain available for non-fiduciaries
and nondiscretionary trustees.\13\
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\13\ 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 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).
(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.''
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The relief for the transaction described in Section III(e) remains
available for any insurance company that is a fiduciary or service
provider (or both) with respect to the plan solely by reason of the
sponsorship of a Pre-Approved Plan, if the purchase is not as a result
of the provision of investment advice within the meaning of ERISA
section 3(21)(A)(ii) and Code section 4975(e)(3)(B) and regulations
thereunder. The relief for the transactions described in Section III(f)
remains available for any insurance company, Principal Underwriter, or
investment company adviser that is a 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), if the purchase is not
as a result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) and
regulations thereunder.\14\
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\14\ The Department is not amending Section III(f) to remove the
phrase ``investment company adviser,'' but notes that this relief is
not available if the purchase is a result of the provision of
investment advice within the meaning of ERISA section 3(21)(A)(ii)
and Code section 4975(e)(3)(B) and regulations thereunder.
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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), which, as
amended, does not include relief for the receipt of otherwise
prohibited compensation in connection with the provision of investment
advice. In the Proposed Amendment, the Department requested comments on
whether parties will continue to use the relief in proposed section
II(a) for the transactions outlined in Section III(a)-(f) and whether
parties are currently relying on Section III(f) for Pre-Approved Plans.
The Department received some comments indicating that Section III(f) is
still relied on in the marketplace. Commenters described this relief as
important for Pre-Approved Plan providers in connection with the
purchase of mutual fund shares with plan assets when the principal
underwriter of the mutual fund acts as the sponsor of the ``Pre-
Approved Plan'' document that is utilized by the plan, or the pre-
approved provider plan provides nondiscretionary trustee services to
the plan. These commenters claim that the loss of Section III(f) relief
would make it difficult to continue to offer these products to the
marketplace and urge the Department to retain the provision. After
consideration of these comments, the Department is retaining Section
III(f) in the Final Amendment with a revision that changes references
to a ``master or prototype plan'' to a ``Pre-Approved Plan,'' which is
consistent with a change in terminology the IRS adopted in IRS Rev.
Proc. 2017-41.
The Department also received several comments on the terms Mutual
Fund Commission and Insurance Sales Commission that the Department used
in the Proposed Amendment. These commenters generally asserted that the
proposed definition of Insurance Sales Commission was unduly narrow and
should have included a broader range of compensation, as permitted
under State insurance laws and, they argued, the Department's prior
interpretations of PTE 84-24. These commenters argued that other forms
of compensation were commonplace, and could be reasonable, beneficial
to Retirement Investors, and fully disclosed.
Some commenters asserted that the Proposed Amendment's definition
of Insurance Sales Commission would prohibit the use of services
provided by independent marketing organizations in connection with
annuity sales marketing support, lead generation, technological
assistance, back office and compliance support, and practice building
and that, in the absence of these services, many Independent Producers
would not survive. Some other commenters claimed that various benefits
subject to continuing production and service requirements, such as
health and retirement plan coverage and contributions, office
allowances, travel expense reimbursements, and other benefits customary
in the industry may not be allowed given the narrowness of these
definitions.
After consideration of the comments, the Department has removed the
terms ``Mutual Fund Commission'' and ``Insurance Sales Commission''
from the exemption. To achieve consistency with existing PTE 84-24, the
Department has reverted to using the term ``sales commission'' in
Section III(a) through (f) of the Final Amendment, which is the same
term that the Department used in PTE 84-24 before this amendment.
Additionally, the Department clarifies the disclosures required by
Section V(b)(1) for transactions under Section III(a) through (f)
involving IRAs may be provided to the IRA owner instead of an unrelated
fiduciary.
Finally, the Department is making minor editorial changes by
capitalizing defined terms where they are used in the existing sections
of PTE 84-24, and moving the definitions from existing Section VI to
new Section X. As amended, Section III(a)-(f) reads:
(a) The receipt, directly or indirectly, by an insurance agent
or broker or a pension consultant of a sales commission from an
insurance company in connection with the purchase, with plan assets,
of an insurance or annuity contract, if the sales commission is not
received as a result of the provision of investment advice within
the meaning of ERISA section 3(21)(A)(ii) and Code section
4975(e)(3)(B) and regulations thereunder.
(b) The receipt of a sales 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 if the sales commission is not received as
a result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) and
regulations thereunder.
(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
[[Page 32306]]
securities issued by an investment company if the purchase is not as
a result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) and
regulations thereunder.
(d) The purchase, with plan assets, of an insurance or annuity
contract from an insurance company if the purchase is not as a
result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) and
regulations thereunder.
(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 if the purchase is not as a
result of the provision of investment advice within the meaning of
ERISA section 3(21)(A)(ii) and Code section 4975(e)(3)(B) and
regulations thereunder.
(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); and the purchase is not as a result of the provision of
investment advice within the meaning of ERISA section 3(21)(A)(ii)
and Code section 4975(e)(3)(B) and regulations thereunder.
The Department notes that references to ``plan assets'' in Section
III(a)-(f) include IRA assets and are not limited to ``Plans'' as
defined in ERISA section 3(3) and described in Code section
4975(e)(1)(A).
Recordkeeping
The Department proposed revising all the recordkeeping provisions
for PTE 84-24 by adding a new Section IX that would have required
additional parties to be able to access the records. Many commenters
expressed concern that the amended recordkeeping provisions would
create unnecessary burden for Independent Producers. In response to
these comments, the Department has scaled back the amended
recordkeeping conditions in the exemption in a similar manner to
changes the Department made to PTE 2020-02. In this Final Amendment,
the Department is retaining the existing recordkeeping language in
Section V(e) for transactions that do not involve the provision of
fiduciary investment advice. The Department also is making minor
editorial changes to this section for clarity, but generally is keeping
the substantive requirements the same.
In a new Section IX, the Department is adding recordkeeping
language for Independent Producers providing fiduciary investment
advice. Under this provision, the Independent Producer must maintain
for a period of six years records demonstrating that it has complied
with the conditions of this exemption and make such records available,
to the extent permitted by law, to any authorized employee of the
Department or the Department of the Treasury, which includes the
Internal Revenue Service (IRS). This condition is consistent with the
recordkeeping requirement in amended PTE 2020-02.
Fiduciary Investment Advice Exemption
The Department is finalizing its Proposed Amendment for investment
advice fiduciaries who are independent insurance agents, with certain
changes discussed below, based on the comments. The conditions for
investment advice are similar to those in PTE 2020-02, but take into
account the unique compliance challenges faced in the independent agent
distribution channel, while promoting a level playing field for all
investment advice professionals.
Several commenters criticized the Department's emphasis on
uniformity. One commenter in particular stated that the Department was
creating disadvantages for the insurance industry by amending PTE 84-
24. Several commenters argued that because insurance companies and
producers have been relying on PTE 84-24 for 40 years, they should be
able to continue doing so. Some of these same commenters also
questioned the Department's authority to regulate the business of
insurance in this manner.
The Department disagrees with these commenters. Retirement
Investors are no less in need of the protective conditions simply
because the individual who is advising them relies on a different
business model. Additionally, as discussed above, the Department has
authority to regulate the business of insurance with respect to
investment advice provided to Retirement Investors and has carefully
tailored the conditions of this exemption to address the specific
conflicts that can arise for Independent Producers that are compensated
through commissions and other compensation when providing investment
advice to Retirement Investors regarding the purchase of an annuity.
Furthermore, the Department is providing additional time for insurance
companies and producers that were relying on PTE 84-24 to come into
compliance with the new conditions of this exemption or PTE 2020-02.
As required by ERISA section 408(a) and Code section 4975(c)(2),
the Department may only issue an exemption if it is protective and in
the interests of Retirement Investors. This Final Amendment ensures
that Retirement Investors receive advice subject to the same core
fiduciary obligations when the investments are insurance products
recommended by Independent Producers, as when they receive advice about
other competing investment alternatives. In the Department's view,
Retirement Investors are best protected by a uniform standard assuring
them that recommendations by fiduciaries are prudent, loyal, and free
from misrepresentations or excessive compensation. Retirement Investors
equally need these fiduciary protections and safeguards against
dangerous conflicts of interest, whether the trusted Investment
Professional is recommending an insurance product or a security. And
there is no reason to believe that an insurance agent is any less
susceptible to conflicts of interest than other categories of
investment professionals.
The relief for fiduciary investment advice in Section II(b) for the
covered transactions described in Section III(g) is generally similar
to the relief provided in PTE 2020-02. Section VI provides conditions
for transactions described in Section III(g) and requires the advice to
be provided by an Independent Producer that is authorized to sell
annuities from two or more unrelated Insurers. However, while PTE 2020-
02 is available for almost any fiduciary investment advice provider,
the conditions in amended PTE 84-24 Sections VII-IX are tailored 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 that do not
meet the definition of ``security'' under Federal securities laws.
Some commenters questioned the administrative feasibility of the
exemption pursuant to ERISA Section 408(a)(1) and Code section
4975(c)(2), taking issue with the added or expanded conditions of
proposed PTE 84-24. One commenter stated that the PTE's conditions
would force covered entities to instead seek relief via individual
exemptions and noted that the Department has been issuing fewer
administrative exemptions in recent years.
The Department disagrees with these assertions. The core conditions
of PTE 84-24, including all the Impartial Conduct Standards, reflect
core
[[Page 32307]]
fiduciary obligations that have been in ERISA since its passage nearly
fifty years ago. The Department is confident that Independent
Producers, who satisfy the fiduciary definition, can recommend covered
insurance products in accordance with basic standards of care and
loyalty, and without overcharging or misleading retirement investors.
As described in detail below, the disclosure and conduct
obligations imposed on Independent Producers are measured and
achievable, and Insurers' oversight obligations are flexible,
principles-based, and build on existing oversight responsibilities
under State law. The Department has narrowed the scope of many of the
amended PTE 84-24's conditions, also easing administration. These
updates are discussed in detail in the sections to follow. The
Department does not believe Independent Producers or Insurers will be
unable to comply with PTE 84-24 or driven to seek individual
exemptions. The amended PTE is not intended to push covered entities to
apply for individual exemptions but is instead intended to require
Independent Producers who provide investment advice for a fee to abide
by a series of conditions uniquely crafted to mitigate conflicts of
interest and protect Retirement Investor interests in these types of
transactions.
Moreover, the Department has accommodated Insurers that rely upon
independent agents by providing that the supervising Insurer does not
have to assume fiduciary responsibility for investment recommendations
by Independent Producers. Also, PTE 2020-02 remains available both to
Independent Producers and Insurers for transactions that fall outside
the scope of PTE 84-24, or to the extent the Insurer takes on fiduciary
responsibility.
Retirement Investors
The Department is revising the definition of Retirement Investor in
Section X(n) to be consistent with the definition in the final
Regulation defining fiduciary investment advice. As revised, both the
final Regulation and Final Amendment define Retirement Investor to mean
a Plan, Plan participant or beneficiary, IRA, IRA owner or beneficiary,
Plan fiduciary within the meaning of ERISA section (3)(21)(A)(i) or
(iii) and Code section 4975(e)(3)(A) or (C) with respect to the Plan,
or IRA fiduciary within the meaning of Code section 4975(e)(3)(A) or
(C) with respect to the IRA. The preamble to the final Regulation
includes additional discussion of ``Retirement Investor,'' which is
defined in the same terms in this Final Amendment to ensure its broad
availability to investment advice fiduciaries.
Related Entity
The Department is clarifying the definition of ``Related Entity''
in Section X(m). Related Entity includes two components: (i) a party
that has an interest in an Investment Professional or Financial
Institution; and (ii) a party in which an Investment Professional or
Financial Institution has an interest, in either case when that
interest may affect the fiduciary's best judgment as a fiduciary. The
Department has also made ministerial changes, such as changing
``described'' to ``defined'' in referencing ERISA section 3(21)(A)(ii)
and Code section 4975(e)(3)(B).
Independent Producers
The term ``Independent Producer'' is defined in Section X(d) 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 to Retirement Investors products of multiple unaffiliated
insurance companies and (1) is not an employee of an insurance company
(including a statutory employee under Code section 3121(d)(3)); or (2)
is a statutory employee of an insurance company that has no financial
interest in the covered transaction. The Department is revising the
definition of Independent Producer to clarify that the exemption is
available only when the Independent Producer is not an employee of an
insurance company (including a statutory employee under Code section
3121(d)(3)) or the Independent Producer is a statutory employee of an
insurance company that has no financial interest in the covered
transaction. Accordingly, the statutory employee would be treated as an
Independent Producer, for purposes of this exemption, with respect to
the recommended sale of an insurance product in which the statutory
employer has no financial interest. To the extent, however, the
statutory employee recommends products in which the employing insurance
company has a financial interest, both the insurance company and the
statutory employee would have to rely on PTE 2020-02 for relief from
any resulting prohibited transactions.
The Proposed Amendment would have limited the definition to exclude
statutory employees entirely, but the Department is revising the
definition in response to comments. Many commenters expressed concern
that the proposed definition was too limited, and several commenters
specifically requested that the Department make PTE 84-24 available for
statutory employees of insurance companies. Some of these commenters
sought broad relief for all recommendations by statutory employees,
including recommendations in which their employing insurance company
had a financial interest. These commenters described the relationship
that an insurance company has with its statutory employees as the
equivalent of the relationship between insurance companies and wholly
independent producers who are not statutory employees. These commenters
argued that a statutory employer cannot supervise statutory employees
under PTE 2020-02. The Department also received comments, however,
arguing for a narrower clarification permitting statutory employees to
rely upon PTE 84-24 as Independent Producers only to the extent they
were recommending the products of other insurance companies that did
not employ them as statutory employees.
In response to these comments, the Department has revised this
definition to permit statutory employees to rely upon PTE 84-24 when
they are recommending transactions in which the statutory employer does
not have a financial interest. In such cases, the statutory employer is
similarly situated to insurance companies that are working with wholly
independent agents. The Final Amendment does not, however, allow
statutory employees to rely on PTE 84-24 when they are recommending
transactions with the insurance company that acts as their statutory
employer. As reflected in the Treasury's implementing regulations,\15\
the statutory employee's principal business activity involves the
solicitation of contracts for that one insurance company which
ordinarily provides facilities and support to the statutory employee
for that purpose, and these statutory employees often receive
[[Page 32308]]
health and other benefits from the ``employing'' insurance companies.
Accordingly, the employing insurance company has a degree of potential
control and influence over the conduct of the statutory employee, and
the statutory employee has a corresponding commitment to that company
that is not necessarily the same as in a relationship between a wholly
independent agent and other Insurers.
---------------------------------------------------------------------------
\15\ 26 CFR 31.3121(d)-1(d)(3)(ii) Full-time life insurance
salesman. An individual whose entire or principal business activity
is devoted to the solicitation of life insurance or annuity
contracts, or both, primarily for one life insurance company is a
full-time life insurance salesman. Such a salesman ordinarily uses
the office space provided by the company or its general agent, and
stenographic assistance, telephone facilities, forms, rate books,
and advertising materials are usually made available to him without
cost. An individual who is engaged in the general insurance business
under a contract or contracts of service which do not contemplate
that the individual's principal business activity will be the
solicitation of life insurance or annuity contracts, or both, for
one company, or any individual who devotes only part time to the
solicitation of life insurance contracts, including annuity
contracts, and is principally engaged in other endeavors, is not a
full-time life insurance salesman.
---------------------------------------------------------------------------
Given these differences, the Department has concluded that PTE 84-
24 is insufficiently protective of Retirement Investors with respect to
recommendations of products in which the statutory employer has a
financial interest. In such cases, both the employing insurance company
and the statutory employee must rely on PTE 2020-02 for relief for
prohibited transactions, just as similarly situated Financial
Institutions rely on PTE 2020-02 with respect to recommendations of
their proprietary products. Accordingly, statutory employees and the
insurance companies would need to meet all the protective conditions of
PTE 2020-02, including the requirement that the insurance company,
acting as the supervising financial institution, acknowledge its
fiduciary status with respect to the recommendation. However, when a
statutory employee recommends transactions with an unrelated and
unaffiliated insurance company, the statutory employee can rely on PTE
84-24 and make the fiduciary acknowledgment as an Independent Producer.
Consistent with the conditions of PTE 84-24, those transactions would
be subject to the supervision of the unrelated insurance company. To
the extent that statutory employers or other insurance companies
believe that neither PTE 2020-02 nor PTE 84-24 is appropriate for their
particular circumstances, they can also apply to the Department for an
individual or class exemption, which may be subject to different or
additional protective conditions.
Insurers
The term ``Insurer'' as defined in Section X(f) is similar to the
term ``Financial Institution'' defined in PTE 2020-02, except it would
be limited to insurance companies. Even though amended PTE 84-24 does
not require Insurers to be fiduciaries, an Independent Producer cannot
rely on the exemption unless it is subject to oversight by an Insurer
that satisfies the conditions set out in this Final Amendment. As under
the NAIC Model Regulation and discussed in the policies and procedures
section below, the Independent Producer must be subject to oversight by
the Insurer whose products it recommends to the Retirement Investor, if
the Independent Producer wants to rely on the exemption. As stated in
Section VI(b), the Insurer will not necessarily become a fiduciary
under ERISA or the Code merely by complying with this exemption's
conditions. However, the Department cautions that Insurers selling
insurance and annuity products through Independent Producers could
become investment advice fiduciaries 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. The investment
advice provisions of PTE 84-24 are solely available to the Independent
Producer.
To facilitate compliance with the amended 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.
Although the Department is creating a pathway for compliance for
Independent Producers that permits insurance companies to oversee the
conduct of Independent Producers under this Final Amendment without
assuming fiduciary status, the Department remains concerned that
without fiduciary status, insurance companies may not take the same
measures to ensure that recommendations are sound and untainted by the
Insurer's conflicts of interest. Accordingly, the Final Amendment does
not provide prohibited transaction relief for the Insurer. If the
Insurer itself is an investment advice fiduciary, it would instead have
to rely on PTE 2020-02. 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.
Exclusions
The advice provisions of PTE 84-24 have exclusions that are similar
to those in PTE 2020-02. Under Section VI(c)(1), relief under PTE 84-24
is not available if 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. For example, an Independent Producer that sponsors a
plan for its employees and provides investment advice to the Plan can
only receive direct expenses and not reasonable compensation for the
advice. However, there is an exception from this restriction in Section
VI(c)(1)(B) that applies when the Plan's named fiduciary or
administrator is selected by an independent fiduciary to provide
investment advice to the Plan. Unlike PTE 2020-02, there is no specific
exclusion for pooled employer plans in PTE 84-24, because the
Department does not expect that pooled employer plans will need to rely
on the limited relief provided in this exemption.
Section VI(c)(2) excludes from Section III(g) transactions when the
Independent Producer is serving 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) (and the regulations issued
thereunder).
Impartial Conduct Standards of Amended PTE 84-24
Similar to the final amendment to PTE 2020-02, amended PTE 84-24
requires Independent Producers to comply with the Impartial Conduct
Standards, which include the Care Obligation, Loyalty Obligation, and
obligations to receive no more than reasonable compensation and not
make misleading statements to Retirement Investors. These standards
form the core protections of both exemptions that are available to
investment advice fiduciaries.
Care Obligation and Loyalty Obligation
The Department is adopting the substance of the Proposed
Amendment's Best Interest standard. However, as in PTE 2020-02, the
Department is replacing the term ``Best Interest'' with its two
separate components: the Care Obligation and the Loyalty Obligation.
Under the amended provision, investment advice must, at the time it is
provided, satisfy the Care Obligation and Loyalty Obligation. The Final
Amendment specifically refers to each obligation separately, although
they are unchanged in substance. Both the Care Obligation and the
Loyalty Obligation must be satisfied when investment advice is
provided. As defined in Section X(b), to meet the Care Obligation, an
advice must reflect the care, skill, prudence, and diligence
[[Page 32309]]
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. As defined in Section X(g), to meet
the Loyalty Obligation, the Independent Producer must not place the
financial or other interests of the Independent Producer, Insurer, or
any Affiliate, Related Entity, or another 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 another 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.
As discussed in the preamble to the final amendment to PTE 2020-02,
the Department is changing the way it refers to these two obligations
in response to comments that the phrase ``best interest'' was used in
many contexts throughout this rulemaking and by various regulators with
possibly different shades of meaning. For example, in paragraph
(c)(1)(i) of the Regulation, fiduciary status is based, in part, on
whether a recommendation is made under circumstances that would
indicate to a reasonable investor in like circumstances that the
recommendation ``may be relied upon by the retirement investor as
intended to advance the retirement investor's best interest.'' In the
context of the Regulation, however, ``best interest'' is not meant to
refer back to the elements of the precise regulatory or statutory
definitions of prudence or loyalty, but rather to refer more
colloquially to circumstances in which a reasonable investor would
believe the advice provider is looking out for them and working to
promote their interests.
Several commenters stated that the Department does not have the
authority to include the Impartial Conduct Standards in either PTE 84-
24 or PTE 2020-02 because doing so would improperly expand Title I
fiduciary standards to entities solely covered by Title II. The
Department disagrees with these commenters. As previously stated in
this grant notice as well as the grant notice for PTE 2020-02 published
elsewhere in today's issue of the Federal Register, Congress expressly
permits the Department to issue exemptions to prohibited transactions
as per ERISA Section 408(a) and, pursuant to the Reorganization Plan
No. 4 of 1978, Code section 4975(c)(2).\16\ For a more detailed
description of the comments received regarding the Department's
authority to include the Impartial Conduct Standards in these
prohibited transaction exemptions, please see the grant notice for PTE
2020-02 published elsewhere in today's issue of the Federal Register.
---------------------------------------------------------------------------
\16\ Under the Reorganization Plan No. 4 of 1978, which Congress
subsequently ratified in 1984, Sec. 1, Public Law 98-532, 98 Stat.
2705 (Oct. 19, 1984), Congress generally granted the Department
authority to interpret the fiduciary definition and issue
administrative exemptions from the prohibited transaction provisions
in Code section 4975. 5 U.S.C. App. (2018).
---------------------------------------------------------------------------
In addition to the general comments discussed in the preamble to
the final amendment to PTE 2020-02, some commenters questioned the
specific ability of Independent Producers to meet the proposed
standards, and thus argued that the amendments to PTE 84-24 failed to
meet the requirements laid out in ERISA section 408(a) and Code section
4975(c)(2). Many of these same commenters stated that the NAIC standard
was sufficiently protective and should be relied upon rather than the
standards in PTE 84-24. Some commenters also raised objections to the
Department imposing these standards on IRAs. Other commenters expressed
support for the proposed standards, and one commenter argued that the
Department's Proposed Amendment was necessary because the NAIC Model
Regulation imposes a ``best interest'' standard in name only.
The Department has considered these comments and determined that it
is essential for Independent Producers to comply with the Care
Obligation and Loyalty Obligation. The Department notes that these
obligations are similar to the standard imposed by New York State in a
rule issued by the New York Department of Financial Services entitled
``Suitability and Best Interest in Life Insurance and Annuity
Transactions'' (referred to as Rule 187). Section 242.4(b) of Rule 187
provides that ``[t]he producer, or insurer where no producer is
involved, acts in the best interest of the consumer when: (1) the
producer's or insurer's recommendation to the consumer is based on an
evaluation of the relevant suitability information of the consumer and
reflects the care, skill, prudence, and diligence that a prudent person
acting in a like capacity and familiar with such matters would use
under the circumstances then prevailing. Only the interests of the
consumer shall be considered in making the recommendation.'' Although
Rule 187 has not been in force for a long time, the Department has not
found any evidence suggesting that insurance producers, including
Independent Producers, cannot comply with this standard. Nor is the
Department aware of any evidence suggesting that this standard has
inappropriately limited or restricted access to advice or insurance
products in New York.
The Department is confident that Independent Producers can comply
with the Section VII(a) of amended PTE 84-24 and rejects any suggestion
that Independent Producers cannot compete under the same framework of
Impartial Conduct Standards that apply to other investment
professionals and financial institutions under PTE 2020-02, including
commission-based broker-dealers. Certainly, the Department believes
that insurance products and annuities are often sound and valuable
investments for Retirement Investors. There is nothing intrinsic to
annuities or inherent in the Independent Producer distribution channel
that suggests that Independent Producers cannot recommend annuities
consistent with the Care Obligation and Loyalty Obligation, or that
they cannot comply with the obligation to avoid overcharging or
misleading Retirement Investors. To the contrary, Retirement Investors
are best served by having recommendations governed by a common
standard, applicable to all fiduciary investment advisers irrespective
of investment product, that is focused on adherence to these basic
obligations. By ensuring that fiduciary investment advice providers
compete on a level playing field subject to a uniform standard, the
Regulation and exemptions ensure that Retirement Investors' legitimate
expectations of trust and confidence are honored, irrespective of the
particular type of product recommended. Fiduciary recommendations to
Retirement Investors should be uniformly driven by the investors'
interests, rather than differences in regulatory stringency that give
one class of investment professionals the unique ability to depart from
basic standards of care and loyalty. Reasonable Compensation
The Department is revising the reasonable compensation standard in
Section VII(a)(2). The Proposed Amendment would have limited the
compensation that an Independent Producer could receive to an
``Insurance Sales Commission,'' defined to mean a sales commission paid
by the Insurance Company or an Affiliate to the Independent Producer
for the service of
[[Page 32310]]
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.
The Department received several comments supporting this proposed
limitation. One commenter noted the ``particularly acute conflicts of
interest'' associated with sales of non-security annuities and
supported not only limiting the compensation that could be paid, but
also supported enhanced disclosure so that the Retirement Investors can
understand the amount of money that the Independent Producer will make
on the transaction. Another commenter similarly supported the
Department's tailored approach that addresses the unique circumstances
and challenges presented by these ``lightly regulated salespeople''
when they provide investment recommendations to Retirement Investors.
The same commenter noted that limiting PTE 84-24 in this way would also
further ensure a level playing field because any producer receiving
other types of compensation would rely on PTE 2020-02. Yet another
commenter criticized the NAIC Model Regulation's approach because it
does not require insurers and producers to mitigate their compensation-
related conflicts of interest that often lead to consumers buying
annuities that are not suitable for them.
Many insurance industry commenters described this definition as
overly narrow, noting that State insurance law does not limit
compensation to commissions. Some commenters pointed to the NAIC Model
Regulation, which specifically permits assistance with marketing,
office support, retirement benefits, or other reasonable compensation,
and other non-cash compensation. One commenter described the impact of
the proposed limitation as contrary to the NAIC's work to develop a
best interest standard, suggesting that it would reduce the investor
choice that the NAIC had intended to preserve.
Many commenters also objected to the limited compensation covered
when compared to the broad relief provided in PTE 2020-02. These
commenters asserted that it would be arbitrary for the Department to
prohibit Independent Producers from receiving legal and disclosed
compensation that would be permissible for a financial institution or
investment professional to receive under PTE 2020-02. One specifically
stated that this limitation was contrary to the Department's stated
intent of creating a level playing field, arguing that with similar
conditions in both exemptions, there was no valid reason for the
Department to prohibit legal and disclosed compensation when received
by independent insurance professionals, but not when it is received by
other types of financial professionals.
Some commenters argued that the limited definition was inconsistent
with the Department's statement in footnote 10 of the Proposed
Amendment's preamble that third party intermediary marketing
organizations (IMOs) could compensate Independent Producers, presumably
with compensation other than insurance commissions, as narrowly
defined. In response to this comment, the Department confirms that all
compensation under PTE 84-24 may be paid directly to IMOs or field
market organizations (FMOs) which then compensate the individual
Independent Producer who has provided investment advice. The Department
also notes that ERISA section 408(b)(2) and Code section 4975(d)(2) are
available for intermediaries providing non-fiduciary services.
Another commenter stated that the proposed limitations on the types
of compensation available for exemptive relief under PTE 84-24 would be
so disruptive that it would call the continued availability of fixed
annuity product distribution channels into question. This commenter
stated that the compensation limits imposed by the Proposed Amendment
would deprive investors of access to fixed annuities as a source of
protection against the risks associated with market volatility and
outliving one's assets. The commenter went on to state that, while the
preamble language to the Proposed Amendment acknowledges the presence
and vital role served by IMOs and FMOs in the training and support of
Independent Producers, the Proposed Amendment would have provided no
relief for any compensation received in connection with the sale of a
recommended product other than so-called ``simple'' insurance
commissions, directly paid by or on behalf of the insurance company.
According to this same commenter, IMOs and FMOs support Independent
Producer success and productivity through a variety of cash and non-
cash compensation structures, including revenue sharing and marketing
allowances. This same commenter stated that non-cash compensation
frequently includes the provision of value-added support including
website construction and maintenance, sales leads, various forms of
commercial advertising and computer software. According to this
commenter, eligibility to receive such compensation is calibrated--at
least to some extent--on Independent Producer productivity and on that
basis is likely to be deemed by the Department under its new fiduciary
definition as compensation received by an Independent Producer in
connection with covered recommendations, necessitating prohibited
transaction exemptive relief, but no such relief would be available
under PTE 84-24 as it was proposed to be amended.
After consideration of the public comments on limiting covered
compensation to Insurance Sales Commissions, the Department has removed
the proposed limitation to Insurance Sales Commissions and expanded the
scope of the exemption to cover compensation as broadly as PTE 2020-02,
including cash and non-cash compensation. In the Department's view, the
Impartial Conduct Standards and other conditions of the exemption
should adequately safeguard Retirement Investors from abuse,
irrespective of the specific type of compensation. At the same time,
the Department emphasizes that all compensation the Independent
Producer receives in connection with a transaction pursuant to PTE 84-
24 must be reasonable within the meaning of ERISA section 408(b)(2) and
Code section 4975(d)(2), and consistent with stringent policies and
procedures designed to ensure Insurance Producers make recommendations
to Retirement Investors that are consistent with the exemption's Care
Obligation and Loyalty Obligation.
No Materially Misleading Statements
Section VII(a)(3) provides the same prohibition on misleading
statements that is part of PTE 2020-02. The Department is also
clarifying that the prohibition against misleading statements applies
to both written and oral statements. This provision requires that an
Independent Producer's statements to the Retirement Investor (whether
written or oral) about the recommended transaction and other relevant
matters must not be materially misleading at the time the statements
are made. For purposes of this condition, the term ``materially
misleading'' includes the omission of information that is needed to
prevent the statement from being misleading to the Retirement Investors
under the circumstances.
To the extent the Independent Producer provides materials,
including marketing materials that are prepared and provided by the
Insurer, this
[[Page 32311]]
condition also would require such materials not to be materially
misleading to the Independent Producer's knowledge.
Disclosure
The Department is generally finalizing the disclosure conditions
with some modifications to the Proposed Amendment that are discussed
below. As discussed in the preamble to the final amendment to PTE 2020-
02, while many commenters raised concerns about the burden imposed on
financial institutions if the Department required additional
disclosure, others expressed support for the Department imposing
additional disclosure obligations. It is important that Retirement
Investors have a clear understanding of the compensation, services, and
conflicts of interest associated with recommendations so that they have
sufficient information to make fully informed investment decisions.
Additionally, clear and accurate disclosures can deter fiduciary
investment advice providers from engaging in otherwise abusive
practices that they would prefer not to expose to the light of day.
Likewise, requiring a clear disclosure of otherwise hidden fees and
conflicts involved in the sale of insurance products may serve to
dissuade certain Insurers and Independent Producers from engaging in
abusive sales practices, resulting in lower overall costs to
consumers.\17\
---------------------------------------------------------------------------
\17\ See, e.g., Santosh Anagol, Shawn Cole & Shayak Sarkar,
Understanding the Advice of Commissions-Motivated Agents: Evidence
from the Indian Life Insurance Market, 99(1) The Review of Economics
and Statistics 1-15, (2015), <a href="https://doi.org/10.1162/REST_a_00625">https://doi.org/10.1162/REST_a_00625</a>.
---------------------------------------------------------------------------
In the preamble to the Proposed Amendment, the Department requested
comments regarding whether Insurers or Independent Producers should be
required to provide additional disclosures on third-party compensation
to Retirement Investors on a publicly available website. One potential
benefit of such disclosure would be to provide information about
conflicts of interest that could be used, not only by Retirement
Investors, but by consultants and intermediaries who could, in turn,
use the information to rate and evaluate various advice providers in
ways that would assist Retirement Investors. Industry commenters
generally opposed the condition, stating that it would impose
significant costs to continuously maintain such a website without a
commensurate benefit to the Retirement Investors.
After review of these comments, the Department has determined not
to include a website disclosure requirement as an exemption condition
at this time. While the Department may reconsider this decision at some
future date based on its experience with the Regulation and related
exemptions, any such future amendments would be subject to public
notice and comment through a rulemaking process. Consistent with the
Recordkeeping conditions in Section IX, the Department intends,
however, to regularly request that Independent Producers provide their
investor disclosures to the Department to ensure that they are
providing sufficient information in a manner that the Retirement
Investor can understand, and that the disclosures are serving their
intended purpose.
Fiduciary Acknowledgment
The disclosures in PTE 84-24 are similar to those in PTE 2020-02.
This ensures that all Retirement Investors receiving fiduciary
investment advice have the same information before engaging in a
transaction, irrespective of product type. PTE 84-24 requires
Independent Producers to provide certain disclosures at or before the
time an investment advice transaction occurs. Section VII(b)(1)
requires a fiduciary acknowledgement, but unlike PTE 2020-02, only the
Independent Producer (and not the Insurer) must acknowledge in writing
that it is a fiduciary providing investment advice to the Retirement
Investor under Title I or II of ERISA or both.\18\ Section VII(b)(2)
requires the Independent Producer to provide the Retirement Investor
with a written statement of the Care Obligation and Loyalty Obligation
that the Independent Producer owes to the Retirement Investor. For
purposes of the disclosures required by Section II(b)(1)-(4), the
Independent Producer is deemed to engage in a covered transaction on
the later of (A) the date the recommendation is made or (B) the date
the Independent Producer becomes entitled to compensation (whether now
or in the future) by reason of making the recommendation.
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\18\ 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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The fiduciary acknowledgment requirement is intended to make it
unambiguously clear that the Independent Producer is making a
recommendation to the Retirement Investor in a fiduciary capacity under
ERISA or the Code. It would not be sufficient, for example, to have an
acknowledgement say that ``I acknowledge fiduciary status under ERISA
with respect the recommendation to the extent the recommendation is
treated by ERISA or Department of Labor regulations as a fiduciary
recommendation,'' because that statement does not inform the investor
whether the Independent Producer is making the recommendation as a
fiduciary. The point of the acknowledgment is to ensure that both the
fiduciary and the Retirement Investor are clear that the particular
recommendation is in fact made in a fiduciary capacity under ERISA or
the Code, so that there is no doubt as to the nature of the
relationship or the associated compliance obligations. Anything short
of definitive fiduciary acknowledgment would fail the exemption
condition. It is not enough to alert the Retirement Investor to the
fact that there may or may not be fiduciary obligations in connection
with a particular recommendation, without stating that, in fact, the
Independent Producer is making the recommendation in the requisite
fiduciary capacity.
As described in the preamble to PTE 2020-02, many commenters argued
that the fiduciary acknowledgment requirement imposes contractual or
warranty requirement on Independent Producers. Several other commenters
noted, however, that neither PTE 84-24 nor PTE 2020-02 impose any
contract or warranty requirements on fiduciary investment advice
providers. Instead, the requirement simply ensures up-front clarity
about the nature of the relationship and services being provided. The
Department agrees with these commenters that this up-front clarity is
important and does not impose any contract or warranty requirement. The
fiduciary acknowledgment condition stands in marked contrast to the
Department's 2016 rulemaking on fiduciary advice; the Department has
imposed no obligation on fiduciary advice providers to enter into
enforceable contracts with or to provide enforceable warranties to
their customers. The only remedies for violations of the exemption's
conditions, and engaging in a non-exempt prohibited transaction, are
those provided by Title I of ERISA, which specifically provides a cause
of action for fiduciary violations with respect to ERISA-covered Plans,
and Title II of ERISA, which provides for imposition of the excise tax.
Nothing in the exemption compels Independent Producers to make
contractually enforceable commitments, and as far as the exemption
provides, they could expressly disclaim any enforcement rights other
than those specifically
[[Page 32312]]
provided by Title I of ERISA or the Code, without violating any of the
exemption's conditions.
For that reason, arguments that the fiduciary acknowledgment
requirement is inconsistent with the Fifth Circuit's opinion in Chamber
of Commerce v. United States Department of Labor, 885 F.3d 360, 384-85
(5th Cir. 2018) (Chamber) are unsupported. In that case, the Fifth
Circuit faulted the Department for having effectively created a private
cause of action that Congress had not provided for violations of the
exemptions' terms. Under this Final Amendment, the Department does not
create new causes of actions, mandate enforceable contractual
commitments, or expand upon the remedial provisions of ERISA or the
Code. Requiring clarity as to the nature of the services and
relationship between Independent Producers and Retirement Investors is
a far cry from the creation of a whole new cause of action or remedial
scheme.
Rather than compel fiduciary status or create new causes of action,
the Department merely conditions the availability of the exemption,
which is only necessary for plan fiduciaries to receive otherwise
prohibited compensation, on clarity that the transaction involves a
fiduciary relationship. In addition, the Department does not purport to
bind State or other Federal regulators in any way or to condition
relief on the availability of remedies under other laws. It no more
creates a new cause of action than any other exemption condition or
regulatory requirement that requires full and fair disclosures of
services and fees. Moreover, the requirement promotes and supports
Retirement Investor choice by requiring clarity as to the precise
nature of the relationship that the firm or advice professional is
undertaking.
The Department additionally notes that conditions requiring
entities to acknowledge their fiduciary status have become commonplace
in recent exemptions the Department has granted over the past two
years. For example, in 2022 and 2023, the Department granted over a
dozen exemptions to private parties in which an entity was required to
acknowledge its fiduciary status in writing as a requirement for
exemptive relief.\19\ Written acknowledgement of fiduciary status was
first required by the Department as early as 1984, when the Department
published PTE 84-14, requiring an entity acting as a ``qualified
professional asset manager'' (a QPAM) to have ``acknowledged in a
written management agreement that it is a fiduciary with respect to
each plan that has retained the QPAM.'' \20\
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\19\ See, e.g., PTE 2023-03, Blue Cross and Blue Shield
Association Located in Chicago, Illinois (88 FR 11676, Feb. 23,
2023); PTE 2023-04, Blue Cross and Blue Shield of Arizona, Inc.,
Located in Phoenix, Arizona (88 FR 11679, Feb. 23, 2023); PTE 2023-
05, Blue Cross and Blue Shield of Vermont Located in Berlin, Vermont
(88 FR 11681, Feb. 23, 2023); PTE 2023-06, Hawaii Medical Service
Association Located in Honolulu, Hawaii (FR 88 11684, Feb. 23,
2023); PTE 2023-07, BCS Financial Corporation Located in Oakbrook
Terrace, Illinois (88 FR 11686, Feb. 23, 2023); PTE 2023-08, Blue
Cross and Blue Shield of Mississippi, A Mutual Insurance Company
Located in Flowood, Mississippi (88 FR 11689, Feb. 23, 2023); PTE
2023-09, Blue Cross and Blue Shield of Nebraska, Inc. Located in
Omaha, Nebraska (88 FR 11691, Feb. 23, 2023); PTE 2023-10, BlueCross
BlueShield of Tennessee, Inc. Located in Chattanooga, Tennessee (88
FR 11694, Feb. 23, 2023); PTE 2023-11, Midlands Management
Corporation 401(k) Plan Oklahoma City, OK (88 FR 11696, Feb. 23,
2023); PTE 2023-16, Unit Corporation Employees' Thrift Plan, Located
in Tulsa, Oklahoma (88 FR 45928, July 18, 2023); PTE 2022-02,
Phillips 66 Company Located in Houston, TX (87 FR 23245, Apr. 19,
2022); PTE 2022-03, Comcast Corporation Located in Philadelphia, PA
(87 FR 54264, Sept. 2, 2022); PTE 2022-04, Children's Hospital of
Philadelphia Pension Plan for Union-Represented Employees Located in
Philadelphia, PA. (87 FR 71358, Nov. 22, 2022).
\20\ PTE 84-14, Part V, Section (a), (49 FR 9494, March 13,
1984).
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One commenter additionally opined that the fiduciary
acknowledgement condition constitutes ``compelled'' and ``viewpoint-
based'' speech in violation of the First Amendment and warrants
application of a `strict scrutiny' standard of review. As discussed in
greater detail in the preamble to the Regulation published elsewhere in
today's Federal Register, neither the Regulation nor the final PTE
amendments prohibit speech based on content or viewpoint in any
capacity. Instead, the Regulation and PTEs simply impose fiduciary
duties on covered parties, and insist on adherence to Impartial Conduct
Standards.
Model Disclosure
To assist Independent Producers in complying with these conditions
of the exemption, the Department confirms that the following model
language will satisfy Section VII(b)(1) and (2).
We are making investment recommendations to you regarding your
retirement plan account or individual retirement account as 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 or otherwise
are compensated creates some conflicts with your financial 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) to you;
<bullet> Never put our financial interests ahead of yours when
making recommendations (give loyal advice);
<bullet> Avoid misleading statements to you 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 you no more than what is reasonable for our
services; and
<bullet> Give you basic information about our conflicts of
interest.
This model language generally applies to the Independent Producer's
recommendations, however, the Independent Producer could also tailor
the acknowledgment to limit it to an individual recommendation or
subset of recommendations for which the Independent Producer is seeking
prohibited transaction relief. However, Independent Producers can only
rely on this exemption with respect to particular recommendations to
the extent they have acknowledged their fiduciary status to Retirement
Investors with respect to those recommendations.
While some commenters requested additional model language, the
Department is not providing model language for the specific material
facts relating to the scope and terms of the relationship, conflict of
interest, and basis for determination to recommend the annuity
disclosures in Section VII(b)(3), (4), and (5), because those
disclosures will need to be tailored to the specific business model.
Relationship and Conflict of Interest Disclosure
Under Section VII(b)(3), the Independent Producer must disclose in
writing all material facts relating to the scope and terms of the
relationship with the Retirement Investor. This includes the material
fees and costs that apply to the Retirement Investor's transactions,
holdings, and accounts. The Independent Producer must also disclose the
type and scope of services provided to the Retirement Investor,
including any material limitations on the recommendations that may be
made to the Retirement Investor. This description must include the
products the Independent Producer is licensed and authorized to sell,
inform the Retirement Investor in writing of any limits on the range of
insurance products recommended, and identify the specific Insurers and
specific
[[Page 32313]]
insurance products available to the Independent Producer for
recommendation to the Retirement Investor. Further, under Section
VII(b)(4), the Independent Producer must also disclose all material
facts relating to Conflicts of Interest that are associated with the
recommendation.
One difference from PTE 2020-02 is that Independent Producers must
also provide a notice describing the Retirement Investor's right to
request additional information regarding cash compensation. If the
Retirement Investor makes that request, the Independent Producer must
give the investor a reasonable estimate of the amount of cash
compensation to be received by the Independent Producer, which may be
stated as a range of amounts or percentages; and whether the cash
compensation will be provided through a one-time payment or through
multiple payments, the frequency and amount of the payments, which may
also be stated as a range of amounts or percentages. Although this is
an additional obligation in PTE 84-24 that is not in PTE 2020-02, the
Department notes this disclosure requirement closely parallels the
obligations of an Independent Producer under Section 6.A.2.a.v and
6.A.2.b of the NAIC Model Regulation \21\ and is similar to, but more
limited than, the standard imposed by New York State in Section 30.3 of
a rule issued by the New York Department of Financial Services entitled
``Producer Compensation Transparency'' (referred to as Rule 194).\22\
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\21\ NAIC Model Regulation Section 6.A.2.a.v. provides that
``[p]rior to the recommendation or sale of an annuity, the producer
shall prominently disclose to the consumer . . . (v) A notice of the
consumer's right to request additional information regarding cash
compensation described in Subparagraph (b) of this paragraph.''
Section 6.A.2.b states that ``[u]pon request of the consumer or the
consumer's designated representative, the producer shall disclose:
(i) A reasonable estimate of the amount of cash compensation to be
received by the producer, which may be stated as a range of amounts
or percentages; and (ii) Whether the cash compensation is a one-time
or multiple occurrence amount, and if a multiple occurrence amount,
the frequency and amount of the occurrence, which may be stated as a
range of amounts or percentages.''
\22\ Section 30.3(a)(4) of Rule 194 provides that ``an insurance
producer selling an insurance contract shall disclose the following
information to the purchaser: . . . (4) that the purchaser may
obtain information about the compensation expected to be received by
the producer based in whole or in part on the sale, and the
compensation expected to be received based in whole or in part on
any alternative quotes presented by the producer, by requesting such
information from the producer.'' If such a request is made, Section
30.3(b) requires the producer to provide the following information:
``(1) a description of the nature, amount, and source of any
compensation to be received . . . ; (2) a description of any
alternative quotes presented by the producer . . . ; (3) a
description of any material ownership interest the insurance
producer . . . has in the insurer . . . ; (4) a description of any
material ownership interest the insurer . . . has in the insurance
producer . . . ; and (5) a statement whether the insurance producer
is prohibited by law from altering the amount of compensation
received from the insurer based in whole or in part on the sale.''
---------------------------------------------------------------------------
The Department thinks that this additional transparency is
especially important in the context of PTE 84-24 because, in contrast
to PTE 2020-02, the Insurer has not assumed fiduciary responsibility
with respect to the recommendation or its compensation and incentive
practices, and because of the importance of these financial incentives
in driving investment recommendations. As noted above, it is important
that Retirement Investors have a clear understanding of the
compensation, services, and conflicts of interest associated with
recommendations so that they have sufficient information to make fully
informed investment decisions. Additionally, clear and accurate
disclosures can deter Independent Producers and Insurers from engaging
in otherwise abusive practices that they would prefer not to expose to
the light of day. Likewise, requiring a clear disclosure of otherwise
hidden fees and conflicts involved in the sale of insurance products
may serve to dissuade Insurers and Independent Producers from making
imprudent recommendations that are driven by outsized financial
incentives, rather than the Retirement Investor's best interests,
resulting in lower overall costs to consumers.\23\
---------------------------------------------------------------------------
\23\ See, e.g., Santosh Anagol, Shawn Cole & Shayak Sarkar,
Understanding the Advice of Commissions-Motivated Agents: Evidence
from the Indian Life Insurance Market, 99(1) The Review of Economics
and Statistics 1-15, (2015), <a href="https://doi.org/10.1162/REST_a_00625">https://doi.org/10.1162/REST_a_00625</a>.
---------------------------------------------------------------------------
Best Interest Documentation and Rollover Disclosure
Section VII(b)(5) additionally requires Independent Producers to
consider and document their basis for the determination to recommend an
annuity product to the Retirement Investor before the recommended
annuity is sold. The Independent Producer must also provide this
documentation to both the Retirement Investor and to the Insurer. The
Department notes that the NAIC Model Regulation also requires producers
to make a written record of any recommendation and document the basis
for the recommendation.\24\
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\24\ Section 6.A.4.
---------------------------------------------------------------------------
Consistent with the changes the Department is making to PTE 2020-
02, Section VII(b)(6) of the Final Amendment requires that, before
engaging in or recommending that a Retirement Investor engage in a
rollover from a Plan that is covered by Title I of ERISA or making a
recommendation to a Plan participant or beneficiary as to the post-
rollover investment of assets currently held in a Plan that is covered
by Title I of ERISA the Independent Producer must consider and document
the bases for its recommendation that the Retirement Investor engage in
the rollover transaction and must provide that documentation to both
the Retirement Investor and the Insurer. Relevant factors the
Independent Producer must consider include, to the extent applicable
but not limited to (A) the alternatives to a rollover, including
leaving the money in the Plan, if applicable; (B) the fees and expenses
associated with the Plan and the recommended investment; (C) whether an
employer or other party pays for some or all of the Plan's
administrative expenses under the Plan; and (D) the different levels of
fiduciary protection, services, and investments available.
The Department received many comments on this condition. As
discussed in the preamble to the final amendment to PTE 2020-02, the
Department received support for the rollover disclosure provision. For
example, one commenter highlighted the significance of a rollover
decision and said that a ``careful analysis'' is needed, along with
information about fees, expenses, and other investment options, in
order to provide Retirement Investors with a ``well-supported''
recommendation. Some commenters supporting the condition noted the
conflicts of interest inherent with respect to many annuity sales and
that annuity transactions can be extremely difficult and costly to
reverse. The written documentation requirement ensures that Independent
Producers undertake a careful analysis and document their reasoning for
recommending these transactions, which will help ensure that their
recommendations are well-supported and comply with the Impartial
Conduct Standards.
Other commenters expressed concern with the required rollover
disclosure. For example, one commenter stated that it is unclear how an
Independent Producer could compare fees and expenses of employer plans
without an annuity option with a recommended annuity. According to this
commenter, comparing annuities to other investment options are ``an
apples-to-oranges comparison that would likely confuse a participant
more than help.'' Another commenter characterized the condition as
potentially requiring Independent
[[Page 32314]]
Producers to violate the law, because as described by the commenter
Federal securities laws prohibit individuals from recommending or
providing detailed information or advice about securities unless they
have a securities license. Thus, according to the commenter,
Independent Producers who do not have a securities license (as most do
not) would be forced to either break the law to comply with this
condition or undertake the expense and burden of obtaining the
appropriate securities licenses.
The Department disagrees with this characterization of the
exemption condition. While Independent Producers are required to
consider alternatives to the rollover from the Title I Plan into an
annuity, they are not required to recommend or provide detailed
information or advice about securities. Nothing in the exemption
requires or suggests that Independent Producers are obligated to make
advice recommendations as to investment products they are not qualified
or legally permitted to recommend. The Department notes that nothing in
the exemption or the Impartial Conduct Standards prohibits investment
advice by ``insurance-only'' agents or requires such insurance
specialists to render advice with respect to other categories of assets
outside their specialty or expertise. There may be circumstances when
the best advice an Independent Producer can give an investor is to
bring in or work with another Investment Professional who can make a
recommendation that is consistent with the Impartial Conduct Standards.
A rollover recommendation should not be based solely on the Retirement
Investor's existing investment allocation without any consideration of
other investment options in the Retirement Investor's Title I Plan. The
Independent Producer must carefully consider the options available to
the investor, including options other than the Retirement Investor's
existing Plan investments, before recommending that the participant
roll assets out of the Title I Plan. Similarly, if an Independent
Producer limits its recommendations to annuities or to a limited menu
of annuities provided by specific insurers, it could not justify a
recommendation that was imprudent on the basis that it was the most
appropriate alternative from the Independent Producer's range of
available investment alternatives. If none of the available annuity
options could be recommended, without violating the Independent
Producer's Care Obligation or Loyalty Obligation, it would need to
refrain from recommending any of the offerings, even though it would
mean turning away business.
Other commenters expressed concern about the level of detail
required and suggested that when enforcing this condition, the
Department should take into account that fact that many Independent
Producers are small businesses with minimal resources. Another
commenter suggested that the Department should rely instead on language
from the NAIC Model Regulation or the SEC's Regulation Best Interest.
While the Department acknowledges these comments, it has determined
to retain the rollover disclosure in amended PTE 84-24. As identified
by some commenters, this disclosure provides important protections and
information to Retirement Investors. This condition, which also matches
Section II(b)(5) of the final amendment to PTE 2020-02, reflects the
clear importance of sound advice with respect to rollovers.
Recommendations to roll assets out of an ERISA-covered Plan often
involve a Retirement Investor's lifetime savings and are critical to
the investor's retirement security. For many Retirement Investors, the
recommendation to roll their savings out of the Plan and invest those
savings in an annuity expected to provide income for the rest of their
life is the single most important recommendation they will ever
receive.
The importance of the rollover documentation and disclosure
requirement is proportional to the importance of the advice, and
rightly focuses the Independent Producer's attention on reasonable
alternatives to the rollover and annuity purchase, comparative fees and
expenses, and different levels of fiduciary protections, services, and
investments available before and after the roll-over. Documenting the
bases for the recommendations also enables the Insurer to verify
compliance with its policies and procedures, and ensure they are
adequate.
As discussed in the preamble to amended PTE 2020-02, the Department
is making a significant change to the disclosure provisions in the
final amendments to both PTE 2020-02 and PTE 84-24 in response to
comments. The Proposed Amendment specified that the rollover
documentation and disclosure requirement would have extended to
recommended rollovers from a Plan to another Plan or IRA as defined in
Code section 4975(e)(1)(B) or (C), from an IRA as defined in Code
section 4975(e)(1)(B) or (C) to a Plan, from an IRA to another IRA, or
from one type of account to another (e.g., from a commission-based
account to a fee-based account). In response to comments, the
Department is narrowing the required rollover disclosure in the Final
Amendment so that it only applies to rollovers from Title I Plans.
Under amended PTE 84-24, Independent Producers are not required to
document and disclose recommendations to roll assets over from one
Title I Plan to another Title I Plan, from one IRA to another IRA or to
change account types. Of course, these types of transactions may
require Independent Producers' special attention, and as discussed
further below, Insurers may wish to specify in their policies and
procedures how they will manage these types of transactions.
Good Faith and Exception for Disclosures Prohibited by Law
The Department is adding clarifications in Section VII(b)(7) of the
Final Amendment that an Independent Producer will not fail to satisfy
the disclosure conditions in Section VII(b) solely because they make an
error or omission in disclosing the required information while acting
in good faith and with reasonable diligence, provided that the
Independent Producer discloses the correct information as soon as
practicable, but not later than 30 days after the date on which it
discovers or reasonably should have discovered the error or omission.
Similarly, Section VII(b)(8) allows Independent Producers to rely in
good faith on information and assurances from each other and 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.
Additionally, under Section VII(b)(9), the Independent Producer is not
required to disclose information pursuant to Section VII(b) if such
disclosure is otherwise prohibited by law. These provisions are
consistent with PTE 2020-02. The Department did not receive substantive
comments on these provisions and is finalizing them as proposed.
Policies and Procedures
While Independent Producers are free to recommend a variety of
Insurers' products, they do not operate outside the control and
influence of the Insurers whose products they recommend. To the
contrary, these Insurers set the Independent Producers' compensation
and incentives, provide training, oversee compliance with State law
obligations and the Insurer's policies and procedures, and
substantially determine how and whether an Independent Producer will be
able to
[[Page 32315]]
recommend the Insurers' products. Because of their authority over the
sale of their products and over the conduct of Independent Producers,
the Insurers' actions and the financial incentives they create can
promote or undermine participant interests.
Despite the central and obvious importance of the Insurers
themselves to the Independent Producer distribution channel, the
Department has decided not to condition relief under this exemption on
Insurers' acknowledgment of fiduciary status with respect to
Independent Producers' recommendations. This decision takes into
account many Insurers' strong concerns about being held accountable as
fiduciaries for the actions of Independent Producers who are not
subject to their control in the same way that, for example, common law
employees are subject to their employer's control. However, the
Department's ability to structure the exemption to cover Independent
Producers and protect the interests of Retirement Investors importantly
depends on the Independent Producers' ability to make recommendations
that are subject to careful compliance-oriented institutional oversight
by Insurers that is focused on Retirement Investors' best interests,
and on the mitigation and avoidance of conflicts of interest.
It is critically important to the success of this exemption that
the Insurers, whose products Independent Producers recommend as
fiduciaries, pay careful attention to any conflicts associated with
Independent Producers' recommendations of their products, appropriately
manage those conflicts of interest, and adopt and implement appropriate
supervisory oversight mechanisms, as set forth below. Without these
protections, the Department would be unable to conclude that this
exemption is sufficiently protective of Retirement Investors and their
interests and would have to consider imposing more stringent protective
conditions or simply require Independent Producers and Insurers to rely
on PTE 2020-02, which is broadly available to them even in the absence
of this exemption.\25\
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\25\ While this exemption does not require Insurers to
acknowledge fiduciary status, Insurers can.by their own conduct,
effectively make recommendations and assume fiduciary responsibility
for those recommendations. When they do so, they should rely upon
PTE 2020-02 for relief, inasmuch as this exemption provides relief
only to the Independent Producers. The Department believes that the
relief provided by this exemption is appropriately tailored to the
Independent Producer distribution channel, but it will monitor
performance under the exemption closely to ensure that it meets its
protective purposes.
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Accordingly, Section VII(c)(1) conditions relief on the actions of
the Insurer to establish, maintain, and enforce written policies and
procedures for the review of each recommendation made by an Independent
Producer before an annuity is issued to a Retirement Investor pursuant
to an Independent Producer's recommendation. The policies and
procedures must be prudently designed to ensure compliance with the
Impartial Conduct Standards and other exemption conditions. The Insurer
must prudently review the Independent Producer's recommendations of its
products, and this review must be made without regard to the Insurer's
own interests.
Section VII(c)(2) further conditions relief on a requirement that
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 Retirement Investor's interest. In this regard, the
Insurer must not use quotas, appraisals, performance or personnel
actions, bonuses, contests, special awards, differential compensation,
or other similar actions or incentives in a manner that is intended, or
that a reasonable person would conclude are likely, to result in
recommendations that do not meet the Care Obligation or Loyalty
Obligation to the Retirement Investor.
As further explained below, this condition applies an objective
standard focused on whether a reasonable person would conclude that the
Insurer's actions or incentives were likely to result in
recommendations that do not meet the Care Obligation or Loyalty
Obligation. Insurers and Independent Producers must avoid and mitigate
conflicts of interest to the extent possible and rely on oversight
structures that prevent those conflicts of interest from driving
investment recommendations, rather than the financial interests of
Retirement Investors.
Under Section VII(c)(3), the Insurer's policies and procedures must
also include a prudent process for determining whether to authorize an
Independent Producer to sell the Insurer's annuity contracts to
Retirement Investors. Specifically, the Insurer must have a prudent
process for identifying Independent Producers who have failed to adhere
to the Impartial Conduct Standards, or who lack the necessary
education, training, or skill to provide investment advice to
Retirement Investors. A prudent process includes careful review of
objective material, such as 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.
Discussion of Comments
The Department has made minor edits to the Policies and Procedures
requirement in Section II(c) in response to commenters. To ensure
Retirement Investors receive the same protections, whether they receive
advice under PTE 2020-02 or PTE 84-24, the Department has made the
policies and procedures conditions substantively identical, with a few
specific obligations tailored to the insurance industry.
Obligation on Insurers
Many commenters expressed concern that the Policies and Procedures
requirement would be too difficult to meet for Insurers, who are not
fiduciaries under the exemption. Some commenters argued the Policies
and Procedures requirement was in conflict with State law. One
commenter contrasted the Department's conditions with the NAIC
requirements, which the commenter described as specific, actionable,
and proportional to the relationship between insurer and agent. Another
commenter described the proposed policies and procedures conditions as
unworkable and objected to their departure from less demanding State
laws, which the commenter said would not require the insurer to
directly supervise each Independent Producer. A few commenters urged
the Department to adopt the NAIC Model Regulation as a safe harbor.
Other comments focused on practical challenges associated with some
interpretations of the exemption's requirements. For example, one
commenter argued that use of the term ``ensure'' was unacceptable
because Insurers do not control Independent Producers and therefore
cannot guarantee their compliance. Another commenter stated that
requiring an insurer to review the recommendations of third-party
products is an impossible task because they do not know those products
and the products are not and
[[Page 32316]]
cannot be in their system for review. This commenter further questioned
how an insurer can determine whether the recommendation is in the best
interest of the Retirement Investor as compared to other products the
Independent Producer is authorized to sell, if the Insurer is not
required to supervise an Independent Producer's recommendations of
other Insurers' products. This same commenter urged the Department to
specify in the operative text that supervision does not include an
obligation to consider and compare other companies' products. Another
commenter also characterized the exemption as requiring Insurers to
review all conduct of Independent Producers and stressed the fact that
Insurers are not able to control all the actions of Independent
Producers to the same degree as, for example, broker-dealers can
regulate the conduct of their registered representatives.
Other commenters supported the obligation imposed on Insurers. One
commenter pointed to the greater risk that a recommendation in the
independent channel will be tainted by conflicts of interest because
there is no single institution overseeing each recommendation. To
address these conflicts without imposing fiduciary status on all
Insurers, each Insurer must exercise oversight over Independent
Producers to the extent the Independent Producer is selling the
Insurer's own products. To do this, the Insurer must have reasonably
designed policies and procedures and must not encourage or reward
producers for violating the Impartial Conduct Standards. Another
commenter expressed significant concerns with the NAIC Model
Regulation. Under the NAIC Model Regulation, insurers and producers are
not required to mitigate the compensation-related conflicts of interest
that are often responsible when consumers are given bad advice and end
up buying annuities that are not suitable for them.
The Department has considered these comments and continues to
believe that the policies and procedures requirement is essential to
the exemption. The Department is similarly not adopting the NAIC Model
Regulation as a safe harbor. If trusted Independent Producers are to
recommend insurance products to Retirement Investors, it is important
that they are subject to proper oversight by the Insurer whose products
they are recommending, and that those Insurers pay careful attention to
financial incentives they create or administer that are misaligned with
Retirement Investors' interests. Insurers choosing to rely on
Independent Producers for distribution of their products should be able
to comply with the protective and workable oversight obligations set
out in Section VII(c). Moreover, while there are important differences
between the requirements in Section VII(c) and the NAIC Model
Regulation, as discussed below, the NAIC Model Regulation itself
requires a significant level of supervision demonstrating that Insurers
can (and already must) supervise producers. The NAIC Model Regulation
specifically says, ``An insurer shall establish and maintain a
supervision system that is reasonably designed to achieve the insurer's
and its producers' compliance with this regulation.'' \26\
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\26\ Section 6.C(2). Similarly, Rule 187 Section 224.6 requires
``An insurer shall establish, maintain, and audit a system of
supervision that is reasonably designed to achieve the insurer's and
producers' compliance.'' While Rule 187 imposes a higher standard of
care than the NAIC Model Regulation and contains other provisions
that are more protective of consumers than the NAIC Model
Regulation, the Department has not identified statements from
industry participants or other publicly available information
indicating that carriers or distributors are withdrawing from the
New York annuity market as a result of Rule 187.
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Even if Insurers were not already required to supervise Independent
Producers under State law, the conditions in Section VII(c) do not
place an excessive burden on Insurers. Section VII(c)(1) specifies that
the policies and procedures must be prudently designed to ensure
compliance with the Impartial Conduct Standards and other exemption
conditions. The ``prudently designed'' standard does not require
perfection with respect to every recommendation by every Independent
Producer overseen by the Insurer. The Department recognizes that, even
prudent oversight structures will not prevent every instance of
inappropriate advice, and use of the word ``ensure'' was not intended
to suggest otherwise. When an Independent Producer violates the terms
of this exemption, notwithstanding the Insurer's adoption and
implementation of a prudent oversight structure, the consequence is
that the Independent Producer is responsible for the resulting
prohibited transaction, not that the Insurer is disqualified from
continuing to act as a supervisory Insurer under the exemption. On the
other hand, if the Insurer fails to implement policies and procedures
and conflict-management measures consistent with this exemption,
Independent Producers could not rely on this exemption for relief from
ERISA's prohibited transaction rules.
In response to comments, the Department also confirms that Insurers
are not required to police Independent Producers' recommendations of
competitors' products. As specified in Section VII(c)(1), ``[a]n
Insurer is not required to supervise an Independent Producer's
recommendations to Retirement Investors of products other than
annuities offered by the Insurer.'' Furthermore, Insurers could choose
to comply with the policies and procedures requirement by creating
oversight and compliance systems through contracts with insurance
intermediaries such as IMOs, FMOs or brokerage general agencies (BGAs).
Such intermediaries, for example, could eliminate compensation
incentives across all the Insurers that work with the intermediary,
review Independent Producers' documentations, and/or use of third-party
industry comparisons available in the marketplace to help independent
insurance agents recommend products that are prudent for their
Retirement Investor customers.
The Department acknowledges, however, that this exemption's
policies and procedures requirement is significantly more stringent
than the standards imposed by the NAIC Model Regulation. This reflects
the difference in ERISA's regulatory structure, which is profoundly
concerned about the dangers posed by conflicts of interest as expressed
in the prohibited transaction provisions of Title I and Title II of
ERISA. Under ERISA Section 408(a) and Code section 4975(c)(2), the
Department can grant an exemption only if the exemption is in the
interest of plans and their participants and beneficiaries and
protective of the rights of participants and beneficiaries. The more
stringent requirements of this exemption's policies and procedures are
necessary for the Department to make these findings, and to ensure
uniform protection of Retirement Investors.
In contrast to ERISA's stringent approach to conflicts of interest,
the NAIC Model Regulation's requirements regarding mitigation of
material conflicts of interest is not as protective as either the
Department's approach under ERISA or the SEC's approach under
Regulation Best Interest. This is made clear in the NAIC Model
Regulation's definition of a ``material conflict of interest'' which
expressly carves out all ``cash compensation or non-cash compensation''
from treatment as sources of conflicts of interest.\27\ ``Cash
compensation'' that is excluded from the definition of a material
conflict of interest is broadly defined to include ``any discount,
concession, fee, service fee, commission, sales charge, loan,
[[Page 32317]]
override, or cash benefit received by a producer in connection with the
recommendation or sale of an annuity from an insurer, intermediary, or
directly from the consumer,'' and ``non-cash compensation'' is also
broadly defined to include ``any form of compensation that is not cash
compensation, including, but not limited to, health insurance, office
rent, office support and retirement benefits.'' \28\ The NAIC also
expressly disclaimed that its standard creates fiduciary obligations,
and the obligations in its NAIC Model Regulation differ in significant
respects from those applicable to broker-dealers in the SEC's
Regulation Best Interest or to investment advisers pursuant to the
Advisers Act's fiduciary duty.\29\ For example, in addition to
disregarding all forms of compensation as a source of material
conflicts of interest, the NAIC Model Regulation's ``best interest''
standard is treated as satisfied if four component obligations are
met--the care, disclosure, conflict of interest, and documentation
obligations--but these components do not repeat the NAIC Model
Regulation's best interest obligation not to put the producer's or
insurer's interests before the customer's interest. Instead, they
include a requirement ``to have a reasonable basis to believe the
recommended option effectively addresses the consumer's financial
situation, insurance needs, and financial objectives . . . .''
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\27\ NAIC Model Regulation at section 5.I.(2).
\28\ Id. at section 5.B. and J.
\29\ Section 6.A.(1)(d) of the NAIC Model Regulation provides,
``[t]he requirements under this subsection do not create a fiduciary
obligation or relationship and only create a regulatory obligation
as established in this regulation.''
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Obligation on Independent Producers
Other commenters expressed concern that the obligation for Insurers
to establish, maintain and enforce policies and procedures is too much
of a burden for the Independent Producers who must comply with those
policies and procedures. One commenter asserted that, from a practical
perspective, it would be impossible for an Independent Producer to set
up a system requiring the producer to follow different policies and
procedures from different insurers, stating that it would inevitably
lead to the producer's failure to meet the requirements of the Proposed
Amendment. Another commenter stated that the obligation to figure out
how to operate within different policies and procedures developed by
different Insurers would drive many Independent Producers to reduce the
number of Insurers for whom they sell and the number of different
products they recommend. The commenter warned that this reduction could
harm Retirement Investors because it would be based on the Independent
Producer's own compliance burden, rather than the needs of Retirement
Investors.
The Department acknowledges that there may be variations in the
requirements that Insurers impose on Independent Producers or
intermediaries as a result of the requirements of this Final Amendment.
However, Independent Producers already have the obligation to comport
their conduct to the varying contractual arrangements and policies of
different Insurers. As a practical matter, Independent Producers,
either directly, or indirectly through their relationship with an IMO
or other intermediary, must already conform their conduct to the
requirements of the potentially varying policies and procedures of the
different Insurers whose products they recommend. Similarly, as
Independent Producers, they necessarily have to master the intricacies
of varying--and often quite complex--annuity products, compensation
policies and structures, and contractual requirements provided by
multiple insurance companies. The additional burden, if any, of
complying with some additional variation in these same Insurers'
policies and procedures, all of which are aimed at promoting the
uniform goal of ensuring compliance with the Impartial Conduct
Standards, is amply justified by Retirement Investors' interest in
receiving sound advice from trusted Investment Professionals that is
prudent, loyal, and free from misleading statements and excessive
compensation.
Incentives
Commenters expressed particular concern about the requirement that
Insurers may not use 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 do not meet the Care Obligation or Loyalty
Obligation. As noted in the preamble to PTE 2020-02, which contains
essentially the same obligation, some commenters incorrectly read the
Proposed Amendment as conditioning reliance on the exemption on
elimination of all differentials in compensation. Other commenters
viewed the exemption as prohibiting or limiting the use of Insurer-
funded training and educational conferences and programs. For example,
some commenters expressed concern that, under the exemption's terms,
Insurers would not be able to exclude Independent Producers from
training conferences even though they did not make significant sales of
the Insurer's products. Several commenters additionally suggested that
the Department's approach to conflicts of interest is inconsistent with
that of other regulators. These commenters described the preamble to
the Proposed Amendment as reflecting a judgment call by the Department
that such conflicts cannot be sufficiently mitigated and therefore must
be eliminated, and one challenged the Department's authority to impose
such anti-conflict policies on Insurers who had not acknowledged
fiduciary status or undertaken to act in a fiduciary capacity to the
extent the policies exceeded the requirements of State law. One
commenter described the Department's requirements as conflicting with
the NAIC Model Regulation, which the commenter said only prohibits
incentives that are based on sales of specific annuities within a
limited period of time.\30\
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\30\ NAIC Model Regulation section 6.C(2)(h).
---------------------------------------------------------------------------
However, as noted in the preamble to the final amendment to PTE
2020-02, which contains essentially the same requirement as this
exemption, the exemption provision neither categorically bans
differential compensation, nor prohibits Insurers from funding
educational meetings. The exemption merely requires reasonable
guardrails for conferences, especially if they involve travel. The
exemption applies an objective standard focused on whether a reasonable
person would conclude that the Insurer's actions or incentives were
likely to result in recommendations that do not meet the Care
Obligation or Loyalty Obligation. The Department recognizes that it is
impossible to eliminate all conflicts of interest with respect to the
commission-based sale of insurance products, and the Department is not
demanding the impossible. Instead, the Department is requiring Insurers
and Independent Producers to avoid and mitigate conflicts of interest
to the extent possible and to rely on oversight structures that prevent
those conflicts of interest from driving investment recommendations,
rather than the financial interests of Retirement Investors. The
Department further confirms that an Independent Producer may receive
reasonable and customary deferred compensation or subsidized health or
pension benefit arrangements such as typically provided to a statutory
``employee'' as defined in Code section 3121(d)(3) without, in and of
itself,
[[Page 32318]]
violating the conditions of this exemption. However, Insurers working
with these statutory employees must ensure that their policies and
procedures and incentive practices are reasonably and prudently
designed as required by Section VII(c).
While the Department acknowledges that the exemption imposes more
stringent standards on Independent Producers than many State laws and
the NAIC Model Rule, the exemption is fully consistent with the
Department's authority and responsibilities under ERISA. The Department
has conditioned relief from ERISA's prohibited transaction provisions
on compliance with the exemption conditions based on its separate
authority under Federal law, which governs Plan and IRA investments and
fiduciary investment recommendations, irrespective of the type of
investment product recommended, including insurance products and non-
insurance products alike.
ERISA imposes an obligation on the Department to safeguard
Retirement Investors from conflicts of interest. Under ERISA, in
contrast to most State insurance laws, fiduciary advice providers are
categorically prohibited from making investment recommendations that
result in their receipt of variable compensation, unless permitted by a
special exemption granted by statute or the Department. The Department
can only grant exemptions that it finds are in the interest of and
protective of Retirement Investors.\31\
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\31\ ERISA section 408(a)(2), (3); 29 U.S.C. 1108(a)(2), (3);
Code section 4975(c)(2)(B), (C).
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Moreover, the conflicts of interest that give rise to prohibited
transactions under Titles I and II of ERISA, include conflicts of
interest associated with compensation, such as commissions and fees
that the NAIC Model Regulation expressly excludes from treatment as
material conflicts of interest. Specifically, the NAIC Model
Regulation's definition of a ``material conflict of interest''
expressly carves out all ``cash compensation or non-cash compensation''
from treatment as sources of material conflicts of interest.\32\ This
``cash compensation,'' which is excluded from the definition of a
material conflict of interest, is broadly defined to include ``any
discount, concession, fee, service fee, commission, sales charge, loan,
override, or cash benefit received by a producer in connection with the
recommendation or sale of an annuity from an insurer, intermediary, or
directly from the consumer.\33\ ``Non-cash compensation'' is also
broadly defined to include ``any form of compensation that is not cash
compensation, including but not limited to, health insurance, office
rent, office support and retirement benefits.'' \34\
---------------------------------------------------------------------------
\32\ NAIC Model Regulation at section 5.I.
\33\ NAIC Model Regulation at section 5.B.
\34\ NAIC Model Regulation at section 5.J.
---------------------------------------------------------------------------
In contrast, the SEC, like the Department of Labor, recognizes that
such compensation creates significant conflicts of interest, as
recognized in its Regulation Best Interest and under the fiduciary duty
of the Investment Advisers Act of 1940. In an FAQ regarding this
regulation, SEC staff provided examples of common sources of conflicts
of interest for broker-dealers, investment advisers, or financial
professionals, and specifically included ``compensation, revenue or
other benefits (financial or otherwise).'' \35\
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\35\ See Staff Bulletin: Standards of Conduct for Broker-Dealers
and Investment Advisers Conflicts of Interest, Q2, available at
<a href="https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest">https://www.sec.gov/tm/iabd-staff-bulletin-conflicts-interest</a>.
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This Final Amendment appropriately follows Federal law, as
expressed in ERISA, to protect Plan and IRA investors. The more
stringent Federal protections adopted here with respect to Federally
regulated retirement investments fully accord with ERISA's requirements
and the authority conferred by Congress to the Department in ERISA
section 408(a) and Code section 4975(c)(2) to protect Retirement
Investors from harmful conflicts of interest.
The Department has specifically granted this Final Amendment to
permit Independent Producers to receive compensation that may vary
based on their specific investment recommendations, such as sales
commissions, that otherwise would be prohibited by ERISA's broad
categorical prohibitions on the receipt of such conflicted compensation
by fiduciaries. However, in order to receive such compensation when
acting as fiduciaries, Independent Producers must recommend products
only from Insurers that pay attention to the conflicts that are
inherent in their compensation models and take special care to avoid
creating or implementing compensation practices that are intended, or
that a reasonable person would conclude are likely, to result in
recommendations that do not meet the Care Obligation or Loyalty
Obligation of this Final Amendment.
However, as discussed above, because of Insurer concerns about
being held responsible as fiduciaries for the conduct of Independent
Producers whom they do not hire or control as common law employees, the
Department has not conditioned relief on the Insurer's acknowledgement
of fiduciary status with respect to the Independent Producer's
recommendation of its insurance products. Instead, it simply requires
that Independent Producers that receive otherwise prohibited
compensation subject to appropriate oversight and incentive structures.
Under the Final Amendment, the oversight is conducted by the same
Insurers who create the incentive structures for the products in the
first place and generally already have oversight responsibility over
Independent Producers under State law.
The Department understands that Insurers significantly rely on
educational conferences for Independent Producers, as commenters
indicated, and that such conferences and training can promote
Retirement Investors' interests. Accordingly, the Department stresses
that it is not prohibiting such conferences. However, participation in
and reimbursement for these conferences must be structured in a manner
to ensure they are not likely to cause Independent Producers to make
recommendations that violate this exemption's Care Obligation or
Loyalty Obligation. In addition, the Department notes that properly
designed incentives that are simply aimed at increasing the overall
amount of retirement saving and investing, without promoting specific
products, would not violate the policies and procedures requirement.
As noted in the preamble to the Final Amendment to PTE 2020-02, the
Department also recognizes that it can be proper to tie attendance at
conferences to appropriate sales thresholds in certain circumstances
(for example, insurance companies could not reasonably be expected to
provide training for independent agents who are not recommending their
products). On the other hand, parties must take special care to ensure
that training conferences held in vacation destinations are not
designed to incentivize recommendations that run counter to Retirement
Investor interests. Firms should structure training events to ensure
that they are consistent with the Care and Loyalty Obligations.
Recommendations to Retirement Investors should be driven by the
interests of the investor in a secure retirement. Certainly, parties
should avoid creating situations where the training is merely
incidental to the event, and an imprudent recommendation to a
Retirement Investor is the only thing standing between an Investment
Professional and a luxury getaway vacation.
[[Page 32319]]
Reviewing Independent Producers
Some commenters raised specific concerns with the requirement in
Section VII(c)(3), which provides that the Insurer whose product is
recommended has a prudent process for determining whether to authorize
an Independent Producer to sell the Insurer's annuity contracts and to
protect the Retirement Investor from Independent Producers who have
failed to adhere to the Impartial Conduct Standards or who lack the
necessary education, training, or skill. A prudent process would
include review of such objective materials as 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. Section VII(d)(1) specifies that Insurers may rely in part on
sampling to conduct their retrospective reviews, as long as any
sampling or other method is designed to identify potential violations,
problems, and deficiencies that need to be addressed.
Some commenters objected to provisions in this proposed requirement
that would have required a prudent process ``for taking action to
protect Retirement Investors from Independent Producers who are likely
to fail to adhere to the Impartial Conduct Standards,'' and several
commenters said they do not know how to predict in advance the
likelihood that a producer is ``likely to fail'' in the future. One
commenter additionally asked the Department to state that these
requirements could be limited to objective criteria such as a criminal
background check, license verification, credit history check, and
similar data readily available to the Insurer.
In response to these commenters, the Department has not included
the phrase ``or are likely to fail'' after ``who have failed'' in the
Final Amendment, because it may have been read to require predictive
powers, which the Department did not intend. The Department also agrees
that a prudent process for reviewing Independent Producers must include
a careful review of ``objective material,'' but the Department does not
agree that a prudent process can be fully specified in advance by
reference to a tightly limited set of objective materials and therefore
has not adopted changes requested by commenters to further narrow the
requirements of Section VII(c)(3).
Providing Policies and Procedures to the Department
Proposed Section VII(c)(4) would have required Insurers to provide
their complete policies and procedures to the Department upon request
within 10 business days of the request. The provision is also part of
the Policies and Procedures condition in PTE 2020-02 and was subject to
comments in connection with that exemption. As described in the
preamble to the final amendment to PTE 2020-02, one commenter expressed
support, noting that this condition would provide a meaningful
incentive for Financial Institutions to ensure that policies and
procedures are reasonably designed. Another commenter strongly urged
the Department to eliminate this condition and instead rely on its
subpoena authority, if necessary. Another comment requested more time
to provide the certification to the Department. In response to this
comment, although the Department expects that the policies and
procedures should be easily located, the Department also recognizes the
possibility of inadvertent non-compliance because of the tight
timeline. After considering these comments, the Department has retained
Section VII(c)(4) but extended the time for Insurers to provide their
complete policies and procedures to the Department from within 10
business days as proposed to within 30 days of request.
Retrospective Review
Under Section VII(d), the Insurer whose product the Independent
Producer recommends must have a process for conducting a retrospective
review of each Independent Producer at least annually that is
reasonably designed to detect and prevent violations of, and achieve
compliance with, the exemption's conditions. The retrospective review
also includes a review of Independent Producers' documentation of
rollover recommendations and required rollover disclosure. As part of
this review, the Insurer is expected to prudently determine whether to
continue to permit individual Independent Producers to sell the
Insurer's annuity contracts to Retirement Investors. Additionally, the
Insurer must update its policies and procedures as business,
regulatory, and legislative changes and events dictate, and ensure that
its policies and procedures remain prudently designed, effective, and
compliant with Section VII(c). To ensure Retirement Investors receive
the same protections, whether they receive advice under PTE 2020-02 or
PTE 84-24, the Department has made the retrospective review conditions
substantively identical, with a few specific obligations tailored to
the insurance industry. In addition, under the Proposed Amendment, the
Insurer was expected to give the Independent Producer the methodology
and results of the retrospective review, including a description of any
non-exempt prohibited transaction the Independent Producer engaged in
with respect to investment advice defined under Code section
4975(e)(3)(B), and instruct the Independent Producer to correct those
prohibited transactions, report the transactions to the IRS on Form
5330, pay the resulting excise taxes imposed by Code section 4975, and
provide the Insurer with a certification that the Independent Producer
has filed the Form 5330 within 30 days after the form is due (including
extensions).
Under the Proposed Amendment, the methodology and results of the
retrospective review had to be reduced to a written report that is
provided to a Senior Executive Officer of the Insurer. As proposed,
that Senior Executive Officer also had to certify, annually, that:
(A) The officer has reviewed the retrospective review report;
(B) The Insurer has provided Independent Producers with the
information required under (d)(2) and has received a certification that
the Independent Producer has filed Form 5330 within 30 days after the
form is due (including extensions);
(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 VII(d)(1).
The review, report, and certification was proposed to be completed
no later than six months following the end of the period covered by the
retrospective review. The Proposed Amendment would have required 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.
Some commenters supported the retrospective review condition and
[[Page 32320]]
supported having Insurers undertake a regular process to ensure that
their policies and procedures are reasonably designed to detect and
prevent violations of, and achieve compliance with, the conditions of
the exemption. However, other commenters raised concerns, viewing the
condition as excessive and inefficient. Commenters asserted that it is
both impractical and unnecessary for Insurers to review each
recommendation and expressed concern about the volume of
recommendations. One commenter requested confirmation that testing done
as part of the retrospective review could rely on standard sampling and
testing techniques. Another commenter pointed to the language in the
preamble to the Proposed Amendment acknowledging that insurance
companies working with Independent Producers have less direct control
over the conduct and compensation of Independent Producers than over
their employees. As a result, they stated that Insurers would not have
access to the information they would need to effectively ensure that
Independent Producers fully complied with the Impartial Conduct
Standards and the other exemption conditions. One commenter expressed
concern that under the exemption, Independent Producers are not
required to provide Insurers with sufficient information for them to be
able to conduct the retrospective review. Some commenters argued that
the Department should instead rely on the NAIC Model Regulation's
written report to senior management which details a review, with
appropriate testing, reasonably designed to determine the effectiveness
of the insurer's supervision system, the exceptions found, and
corrective action taken or recommended, if any.
Some commenters also raised specific concerns with the Senior
Executive Officer certification requirement. They noted that other
regulators typically require that certifications provide assurance that
company systems or procedures are ``reasonably designed to achieve
compliance,'' a standard that they asserted was lower than what is
required for Independent Producers to achieve compliance with impartial
conduct standards. Other commenters stated that the retrospective
review should not consider the filing of the IRS Form 5330, arguing
this is beyond the Department's regulatory authority. A few commenters
raised specific concerns that Insurers were not the appropriate party
to file Form 5330 under the Code. Others argued that requiring Insurers
to file Form 5300 interfered with State regulation of insurance.
One commenter requested more time to provide the certification to
the Department. In response to this comment, although the Department
expects that these reports should already be completed at the time of
the request and easily located, it recognizes the possibility of
inadvertent non-compliance because of the tight timeline and has
modified the requirement to give Insurers 30 days to provide the
certification.
The Department is finalizing the retrospective review requirement
because of the fundamental importance of a regular review process to
ensure that the Policies and Procedures are working and that
Independent Producers are complying with the Impartial Conduct
Standards. In response to commenters, the Department has added to
Section (d)(1) a clarification that Insurers may rely in part on
sampling of each Independent Producer's transactions to conduct their
retrospective reviews, as long as any sampling or other method is
designed to identify potential violations, problems, and deficiencies
that need to be addressed.
The Department is also making several other changes to specifics of
the retrospective review provision. To address concerns from some
commenters about having the Insurer file Form 5330, the Department is
revising the filing obligation to be the responsibility of the
Independent Producer, which is a fiduciary, and thus a ``disqualified
person liable for the tax under Code section 4975 for participating in
a prohibited transaction.'' \36\ However, the Insurer is expected to
instruct the Independent Producer to correct those prohibited
transactions, report the transactions to the IRS on Form 5330, pay the
resulting excise taxes imposed by Code section 4975, and provide the
Insurer with a certification that it has filed Form 5330 within 30 days
after the form is due (including extensions). The Department is also
revising Section VII(d)(3) for consistency with amended PTE 2020-02.
The methodology and results of the retrospective review must be reduced
to a written report that is provided to a Senior Executive Officer of
the Insurer. This is essential for Insurers to know that their
Independent Producers are actually correcting prohibited transactions.
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\36\ IRS Form 5330 instructions <a href="https://www.irs.gov/pub/irs-pdf/i5330.pdf">https://www.irs.gov/pub/irs-pdf/i5330.pdf</a>.
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The Department is also revising the Senior Executive Officer
certification to incorporate the amended provisions regarding Form
5330. Under the Final Amendment, the required certification states that
the officer has reviewed the retrospective review report, the Insurer
has provided Independent Producers with the information required under
(d)(2), and the Insurer has received a certification that affected
Independent Producers have filed Form 5330 within 30 days after the
form is due (including extensions).
Self-Correction
Section VII(e) allows the Independent Producer to correct
violations to avoid a non-exempt prohibited transaction in certain
circumstances. Self-correction is 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. The correction must
occur no later than 90 days after the Independent Producer learned of
the violation or reasonably should have learned of the violation; 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 be
specifically set forth in the written report of the retrospective
review required under Section VII(d)(2).
The appropriate remedy for a non-exempt prohibited transaction
involving an annuity purchase is rescission, which requires the insurer
to cancel the contract and waive surrender charges. The correction must
occur no later than 90 days after the Independent Producer learned, or
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.
One commenter stated that it is unclear what is exactly meant by a
``mis-sold'' annuity and what is supposed to happen if an agent and
Insurer disagree in that regard. Thus, according to this commenter, it
is unclear how the agent or Insurer in the case of retrospective review
would even discover any non-exempt prohibited transaction. This same
commenter also questioned whether all non-exempt prohibited
transactions require rescission or whether there is a materiality
threshold. This commenter also stated that the Proposed Amendment did
not address the common situation where an Insurer
[[Page 32321]]
rescinds an annuity as a matter of customer service without determining
or admitting any violation of laws or, in this case, noncompliance with
impartial conduct standards. Finally, this commenter asked how
situations would be handled where agents and Insurers disagree on the
need for correction under PTE 84-24.
As discussed in the preamble to PTE 2020-02 in response to
comments, the Department notes that no one is required to use the self-
correction provision. Furthermore, not all violations of the exemption
can be corrected under the self-correction provision. In addition,
minor disclosure failures can be corrected under Section VII(b)((7),
which provides that the Independent Producer will not fail to satisfy
the disclosure conditions solely because it makes an error or omission
in disclosing the required information while acting in good faith and
with reasonable diligence. To avoid a violation of the exemption, the
Independent Producer must disclose the correct information as soon as
practicable, but not later than 30 days after the date on which it
discovers or reasonably should have discovered the error or omission.
Lastly, the Department notes that merely rescinding an annuity as a
matter of customer service is not self-correcting if there was no
violation to correct.
While the Insurer may discover violations eligible for self-
correction as part of its retrospective review under Section VII(d), it
is the Independent Producer's obligation to self-correct under Section
VII(e) to avoid the resulting prohibited transaction and imposition of
an excise tax. If there is disagreement, the Independent Producer
ultimately has the responsibility as a fiduciary to decide whether to
take action. Based on what the Insurer learns through the review
process, and the specific facts and circumstances, a reasonable Insurer
may conclude that it is imprudent to continue authorizing that
Independent Producer to sell its annuity contracts and act accordingly.
To the extent that the Independent Producer does not or cannot correct
the violation, the consequence is that a prohibited transaction has
occurred with attendant liability for the excise tax.
As discussed in the proposal to PTE 2020-02, some commenters raised
concerns about the lack of a materiality threshold, and the requirement
that all mistakes be reported and remediated, no matter how minor or
inadvertent. However, the self-correction provisions are measured and
proportional to the nature of the injury. They simply require timely
correction of the violation of the law and notice to the person
responsible for retrospective review of the violation, so that the
significance and materiality of the violation can be assessed by the
appropriate person responsible for assessing the effectiveness of the
firm's compliance oversight. In addition, to address the commenters'
concern about the burden associated with the self-correction provision,
the Department has deleted the requirement to report each correction to
the Department in this Final Amendment. This change should ease the
compliance burden. Furthermore, to the extent parties are wary of
utilizing the self-correction provision because they would have to
report each self-correction to the Department, they should feel more
comfortable correcting each violation they find that is eligible for
self-correction after this modification. The Department notes that it
may request Independent Producers to provide evidence of self-
corrections through the recordkeeping provisions in Section IX.
Eligibility
The Proposed Amendment added Section VIII which identifies
circumstances under which an Independent Producer would have become
ineligible to rely on the exemption for 10 years, and also
circumstances when an entity would not have been permitted to serve as
an Insurer under this exemption for 10 years. The proposed eligibility
provisions were similar to the provisions of Section III of PTE 2020-02
and are intended to promote compliance with the exemption conditions.
The Department continues to believe that the eligibility provisions are
important to ensure that Independent Producers comply with the
obligations of the exemption, subject to oversight by Insurers that
take compliance with the exemption's conditions seriously. Therefore,
after consideration of the comments, the Department has determined to
retain the eligibility provision of Section VIII, but it has made
several important modifications that are discussed below.
Under the Final Amendment, an Independent Producer or Insurer can
become ineligible as a result of a conviction by: (A) a U.S. Federal or
State court as a result of any felony involving abuse or misuse of such
person's employee benefit Plan position or employment, or position or
employment with a labor organization; any felony arising out of the
conduct of the business of a broker, dealer, investment adviser, bank,
insurance company or fiduciary; income tax evasion; any felony
involving larceny, theft, robbery, extortion, forgery, counterfeiting,
fraudulent concealment, embezzlement, fraudulent conversion, or
misappropriation of funds or securities; conspiracy or attempt to
commit any such crimes or a crime in which any of the foregoing crimes
is an element; or a crime that is identified or described in ERISA
section 411; or (B) a foreign court of competent jurisdiction as a
result of any crime, however denominated by the laws of the relevant
foreign or state government, that is substantially equivalent to an
offense described in (A) above (excluding convictions that occur within
a foreign country that is included on the Department of Commerce's list
of ``foreign adversaries'' that is codified in 15 CFR 7.4 as amended).
Independent Producers and Insurers also lose eligibility if they
are found or determined in a final judgment or court-approved
settlement in a Federal or State criminal or civil court proceeding
brought by the Department, the Department of the Treasury, the Internal
Revenue Service, the Department of Justice, a State insurance
regulator, or State attorney general, to have participated in one or
more of the following categories of misconduct irrespective of whether
the court specifically considers this exemption or its terms: (A)
engaging in a systematic pattern or practice of violating the
conditions of this exemption in connection with otherwise non-exempt
prohibited transactions; (B) intentionally engaging in conduct that
violates the conditions of this exemption in connection with otherwise
non-exempt prohibited transactions; or (C) providing materially
misleading information to the Department, the Department of the
Treasury, the Internal Revenue Service, the Department of Justice, a
State insurance regulator, or State attorney general in connection with
the conditions of the exemption.
In addition, Independent Producers (but not Insurers) will become
ineligible if they are found or determined in a final judgment or
court-approved settlement in a Federal or State criminal or civil court
proceeding brought by the Department, the Department of the Treasury,
the Internal Revenue Service, the Department of Justice, a State
insurance regulator, or State attorney general, to have engaged in a
systematic pattern or practice of failing to correct prohibited
transactions, report those transactions to the IRS on Form 5330, or pay
the resulting excise taxes imposed by Code section 4975 in connection
with non-exempt prohibited
[[Page 32322]]
transactions involving investment advice under Code section
4975(e)(3)(B).
The Final Amendment specifies that an Insurer or Independent
Producer that is ineligible to rely on this exemption may rely on an
existing statutory or separate class prohibited transaction exemption
if one is available or may apply for an individual prohibited
transaction exemption from the Department.
Most of the comments the Department received on eligibility were
combined with the comments submitted under PTE 2020-02 and were
essentially the same. Those comments directly submitted under PTE 84-24
are also very similar to the comments under PTE 2020-02 regarding
eligibility. For additional discussion of the comments received
regarding eligibility please see the grant notice for PTE 2020-02
published elsewhere in today's issue of the Federal Register. Many
commenters variously asserted that the proposed addition of the
eligibility provisions to the exemptions exceeded the Department's
authority; undermined parties' ability to rely on the exemptions;
unduly broadened the conditions for eligibility; and would result in
reduced choice and access to advice for Retirement Investors.
Generally, these commenters requested that the Department not include
the proposed ineligibility sections in the Final Amendment and
requested that, if the Department does move forward with these
sections, that it apply the provisions prospectively.
Scope of Ineligibility
One commenter claims that the Proposed Amendment would impose
unreasonably harsh sets of conditions on both Independent Producers and
on Insurers, under which both would be under constant threat of loss of
the exemption for a 10-year period and, in the case of Insurers, loss
of the exemption could be triggered by events involving other parties
over whom the Insurer has no direct involvement. Another commenter
expressed concern that the proposed ineligibility provisions applied
too broadly to insurance producers, insurance carriers and their
foreign and domestic affiliates.
Some commenters objected to the breadth of the provisions'
application to ``Affiliates'' and requested that the Final Amendment
instead use the term ``controlled group,'' which has a clear and well-
defined meaning. Some commenters similarly objected to the scope of
conduct treated as disqualifying and asserted that disqualification
should not extend to criminal conduct that does not involve the
management of retirement assets.
In response to the commenters, the Department has decided to use
the term ``Controlled Group'' for purposes of ineligibility of Insurers
under Section VIII(b) of the exemption and has revised that Section
accordingly. The Final Amendment also adds Section VIII(b)(3), which
defines Controlled Group. Under this definition, an entity is in the
same Controlled Group as an Insurer if the entity (including any
predecessor or successor to the entity) would be considered to be in
the same ``controlled group of corporations'' as the Insurer or ``under
common control'' with the Insurer as those terms are defined in Code
section 414(b) and (c) (and any regulations issued thereunder). The
Department declines, however, to narrow the Final Amendments'
definition of crimes to only those crimes that arise out of the
provision of investment advice or the management of plan assets. The
enumerated crimes in Section VIII reflect egregious misconduct,
typically in a financial context, that is clearly relevant to the
parties' willingness and commitment to comply with important legal
obligations. There is little basis for concluding that Retirement
Investors should be sanguine or that the Department should be confident
of compliance when the Independent Producer or Insurer engages in
serious crimes, such as embezzlement or financial fraud, but the
specific victims were non-Retirement Investors. However, to the extent
Independent Producers or Insurers have continued need for an exemption
notwithstanding such a conviction, they can apply with the Department
for an individual prohibited transaction exemption that would include
appropriate protective conditions based on the Department's assessment
of the particular facts and circumstances, and the remedial actions the
parties have taken to ensure a prospective culture of compliance.
Foreign Convictions
Several commenters claimed that the Department has no basis for
expanding the ineligibility provisions to include ``substantially
equivalent'' foreign crimes committed by foreign affiliates and that
the inclusion of foreign affiliates is overbroad and will create
unintended consequences, especially when the conduct does not need to
relate directly to the provision of investment advice. These commenters
stated that such inclusion will result in ineligibility for conduct
that is unrelated to the provision of fiduciary investment advice and
for conduct in which the fiduciary has not participated and about which
it has no knowledge. Another commenter stated ineligibility could be
triggered by events involving other parties over which the insurer has
no direct involvement, such as the conviction of an affiliate company
of any of the specified crimes under the laws of a foreign country.
Several comments regarding PTEs 2020-02 and 84-24 stated that the
proposed ineligibility provisions raised serious questions of fairness,
national security, and U.S. sovereignty. These commenters claimed that
ineligibility could result from the conviction of an affiliate in a
foreign court for a violation of foreign law without due process
protections or without the same level of due process afforded in the
United States. Some commenters state that it is not clear that the
Department is equipped to make the ``substantially equivalent''
determination and doing so could result in inconsistency and
unfairness. One commenter agreed that investment transactions that
include retirement assets are increasingly likely to involve entities
that may reside or operate in jurisdictions outside the U.S. and that
reliance on the exemptions therefore must appropriately be tailored to
address criminal activity, whether occurring in the U.S. or in a
foreign jurisdiction, but noted their concerns with the potential lack
of due process in foreign jurisdictions.
Other commenters were concerned that some foreign courts could be
vehicles for hostile governments to achieve political ends as opposed
to dispensing justice and for interference in the retirement
marketplace for supposed wrongdoing that is wholly unrelated to
managing retirement assets. They further noted concerns that these
governments could potentially assert political influence over fiduciary
advice providers looking to avoid a foreign criminal conviction.
After considering these comments, the Department is retaining the
inclusion of foreign convictions in the Final Amendment. Retirement
assets are often involved in transactions that take place in entities
that operate in foreign jurisdictions therefore making the criminal
conduct of foreign entities relevant to eligibility under PTE 84-24. An
ineligibility provision that is limited to U.S. Federal and State
convictions would ignore these realities and provide insufficient
protection for Retirement Investors. Moreover, foreign crimes call into
question an Insurer's and Independent Producer's culture of compliance
just as much as domestic crimes, whether prosecuted domestically or in
foreign jurisdictions.
[[Page 32323]]
The Department does not expect that questions regarding
``substantially equivalent'' will arise frequently, especially given
the Final Amendment's use of the term ``Controlled Group'' instead of
``Affiliate,'' as discussed above. But, when these questions do arise,
those impacted may contact the Office of Exemption Determinations for
guidance, as they have done for many years.\37\ As discussed in more
detail below, the one-year Transition Period that has been added to the
exemption and the ability to apply for an individual exemption, give
parties both the time and the opportunity to address any issues about
the relevance of any specific foreign conviction and its applicability
to ongoing relief pursuant to PTE 84-24. Insurers and Independent
Producers should interpret the scope of the eligibility provision
broadly with respect to foreign convictions and consistent with the
Department's statutorily mandated focus on the protection of Plans in
ERISA section 408(a) and Code section 4975(c)(2). In situations where a
crime raises particularly unique issues related to the substantial
equivalence of the foreign criminal conviction, the Insurers and
Independent Producers may seek the Department's views regarding whether
the foreign crime, conviction, or misconduct is substantially
equivalent to a U.S. Federal or State crime. However, any Insurer or
Independent Producer submitting a request for review should do so
promptly, and whenever possible, before a judgment is entered in a
foreign conviction.
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\37\ PTE 84-14 contains a similar eligibility provision which
has long been understood to include foreign convictions. Impacted
parties have successfully sought OED guidance regarding this
eligibility provision whenever individualized questions or concerns
arise. See, e.g., Prohibited Transaction Exemption (PTE) 2023-15, 88
FR 42953 (July 5, 2023); 2023-14, 88 FR 36337 (June 2, 2023); 2023-
13, 88 FR 26336 (Apr. 28, 2023); 2023-02, 88 FR 4023 (Jan. 23,
2023); 2023-01, 88 FR 1418 (Jan. 10, 2023); 2022-01, 87 FR 23249
(Apr. 19, 2022); 2021-01, 86 FR 20410 (Apr. 19, 2021); 2020-01, 85
FR 8020 (Feb. 12, 2020); PTE 2019-01, 84 FR 6163 (Feb. 26, 2019);
PTE 2016-11, 81 FR 75150 (Oct. 28, 2016); PTE 2016-10, 81 FR 75147
(Oct. 28, 2016); PTE 2012-08, 77 FR 19344 (March 30, 2012); PTE
2004-13, 69 FR 54812 (Sept. 10, 2004).
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The exemption for Qualified Professional Asset Managers (QPAMs),
PTE 84-14, has a similar disqualification provision and the Department
is not aware that any foreign convictions have occurred in foreign
nations with respect to the QPAM exemption that are intended to harm
U.S.-based financial institutions and believes there is a small
likelihood of such occurrences. Further, the types of foreign crimes of
which the Department is aware from its experience processing recent PTE
84-14 QPAM individual exemption requests for relief from convictions
have consistently related to the subject institution's management of
financial transactions and/or culture of compliance. For example, the
underlying foreign crimes in those individual exemption requests have
included: aiding and abetting tax fraud in France (PTE 2016-10, 81 FR
75147 (October 28, 2016) corrected at 88 FR 85931 (December 11, 2023),
and PTE 2016-11, 81 FR 75150 (October 28, 2016) corrected at 89 FR
23612 (April 4, 2024)); attempting to peg, fix, or stabilize the price
of an equity in anticipation of a block offering in Japan (PTE 2023-13,
88 FR 26336 (April 28, 2023)); illicit solicitation and money
laundering for the purposes aiding tax evasion in France (PTE 2019-01,
84 FR 6163 (February 26, 2019)); and spot/futures-linked market price
manipulation in South Korea (PTE 2015-15, 80 FR 53574 (September 4,
2015)).\38\
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\38\ On December 12, 2018, Korea's Seoul High Court for the 7th
Criminal Division (the Seoul High Court) reversed the Korean Court's
decision and declared the defendants not guilty; subsequently,
Korean prosecutors appealed the Seoul High Court's decision to the
Supreme Court of Korea, On December 21, 2023, the Supreme Court of
Korea affirmed the reversal of the Korean Conviction, and it
dismissed all judicial proceedings against DSK.
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However, to address the concern expressed in the public comments
that convictions have occurred in foreign nations that are intended to
harm U.S.-based financial institutions, the Department has revised
Section VIII(a)(1)(B) and VIII(b)(1)(B) in the Final Amendment to
exclude foreign convictions that occur within foreign jurisdictions
that are included on the Department of Commerce's list of ``foreign
adversaries.'' \39\ Therefore, the Department will not consider foreign
convictions that occur under the jurisdiction of the listed ``foreign
adversaries'' as an ineligibility event and has added the phrase
``excluding convictions and imprisonment that occur within foreign
countries that are included on the Department of Commerce's list of
``foreign adversaries'' that is codified in 15 CFR 7.4.
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\39\ 15 CFR 7.4. The list of foreign adversaries currently
includes the following foreign governments and non-government
persons: The People's Republic of China, including the Hong Kong
Special Administrative Region (China); the Republic of Cuba (Cuba);
the Islamic Republic of Iran (Iran); the Democratic People's
Republic of Korea (North Korea); the Russian Federation (Russia);
and Venezuelan politician Nicol[aacute]s Maduro (Maduro Regime). The
Secretary of Commerce's determination is based on multiple sources,
including the National Security Strategy of the United States, the
Office of the Director of National Intelligence's 2016-2019
Worldwide Threat Assessments of the U.S. Intelligence Community, and
the 2018 National Cyber Strategy of the United States of America, as
well as other reports and assessments from the U.S. Intelligence
Community, the U.S. Departments of Justice, State and Homeland
Security, and other relevant sources. The Secretary of Commerce
periodically reviews this list in consultation with appropriate
agency heads and may add to, subtract from, supplement, or otherwise
amend the list. Sections VIII(a)(1)(B) and VIII(b)(1)(B) of the
Final Amendment will automatically adjust to reflect amendments the
Secretary of Commerce makes to the list.
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Due Process
The Department also received several comments regarding the
proposed ineligibility notice process. The Proposed Amendment would
have provided that the Department could issue a written ineligibility
notice for (A) engaging in a systematic pattern or practice of
violating the conditions of this exemption in connection with otherwise
non-exempt prohibited transactions; (B) intentionally violating, or
knowingly participating in violations of, the conditions of this
exemption in connection with otherwise non-exempt prohibited
transactions; (C) engaging in a systematic pattern or practice of
failing to correct prohibited transactions, report those transactions
to the IRS on Form 5330, and pay the resulting excise taxes imposed by
Code section 4975 in connection with non-exempt prohibited transactions
involving investment advice under Code section 4975(e)(3)(B); or (D)
providing materially misleading information to the Department in
connection with the conditions of the exemption.
Generally, these comments reflected the view that the Department
had inappropriately asserted authority to determine ineligibility
without external review and without appropriate due process
protections. Commenters stressed that disqualification effectively
imposed a 10-year ban, and many expressed the view that more procedural
protections were necessary for such a significant consequence and that
disqualification should be more tightly linked to failure to meet the
conditions of the exemption. Some commenters contended that, by leaving
too much discretion to the Department, the process would create
uncertainty and adversely affect the ability of Retirement Investors to
get sound advice. Some commenters expressed concern that the
Department's ineligibility process was insufficient because it did not
provide a chance for a hearing before an impartial administrative judge
or Article III judge, an express right of appeal, and formal procedures
for the presentation of evidence.
Some commenters on both PTEs 2020-02 and 84-24 also stated that
while the six-month period provided in
[[Page 32324]]
the exemption may be adequate time to send a notice to Retirement
Investors, it is insufficient time for a financial institution to
determine an alternative means of complying with ERISA in order to
continue to provide advice to Retirement Investors. These commenters
requested the Department to revise the exemption to provide for at
least 12 months to make the transition away from reliance on PTE 84-24
or to find an alternative means of complying with ERISA following a
finding of ineligibility.
After consideration of the comments and to address the due process
concerns, the Department has determined to modify Sections VIII(a)(2)
and VIII(b)(2) of the ineligibility provisions. While maintaining the
types of conduct that can lead to ineligibility, amended Section
VIII(a)(2) and VIII(b)(2) of the Final Amendment removes the discretion
of the Department from making the determination of whether the conduct
has occurred and limits disqualification to court-supervised
determinations.
Under the provision as amended, ineligibility under Section
VIII(a)(2) will occur as a result of an Independent Producer being
found or determined in a final judgment or court-approved settlement in
a Federal or State criminal or civil court proceeding brought by the
Department, the Department of the Treasury, the IRS, the Department of
Justice, a State insurance regulator, or a State attorney general to
have participated in one or more of the following categories of conduct
irrespective of whether the court specifically considers this exemption
or its terms: (A) engaging in a systematic pattern or practice of
conduct that violates the conditions of this exemption in connection
with otherwise non-exempt prohibited transactions; (B) intentionally
engaging in conduct that violates the conditions of this exemption in
connection with otherwise non-exempt prohibited transactions; (C)
engaging in a systematic pattern or practice of failing to correct
prohibited transactions, report those transactions to the IRS on Form
5330, or pay the resulting excise taxes imposed by Code section 4975 in
connection with non-exempt prohibited transactions involving investment
advice under Code section 4975(e)(3)(B); or (D) providing materially
misleading information to the Department, the Department of the
Treasury, the Internal Revenue Service, the Department of Justice, a
State insurance regulator, or State attorney general in connection with
the conditions of this exemption.
Likewise, ineligibility under Section VIII(b)(2) will occur as a
result of an Insurer being found or determined in a final judgment or
court-approved settlement in a Federal or State criminal or civil court
proceeding brought by the Department, the Department of the Treasury,
the IRS, the Department of Justice, a State insurance regulator, or a
State attorney general to have participated in one or more of the
following categories of conduct irrespective of whether the court
specifically considers this exemption or its terms: (A) engaging in a
systematic pattern or practice of violating the conditions of this
exemption in connection with otherwise non-exempt prohibited
transactions; (B) intentionally engaging in conduct that violates the
conditions of this exemption in connection with otherwise non-exempt
prohibited transactions; or (C) providing materially misleading
information to the Department, the Department of the Treasury, the
Internal Revenue Service, the Department of Justice, a State insurance
regulator, or State attorney general in connection with the conditions
of this exemption.
Ineligibility under Section VIII(a)(2) and (b)(2) will therefore
operate in the same manner as ineligibility for a criminal conviction
defined in Section VIII(a)(1) and (b)(1), subject to the timing and
scope provisions in Section VIII(c). An Insurer or Independent Producer
will become ineligible only after a court has found or determined in a
final judgment or approved settlement that the conduct listed in
Section VIII(a)(2) or (b)(2) has occurred. In response to concerns
raised by commenters, the Department has made changes so that any
ineligibility occurs only after a conviction, a court's final judgment,
or a court approved settlement.
Thus, ineligibility will follow a determination in civil or
criminal court proceedings subject to the full array of procedural
protections associated with legal proceedings overseen by courts and
will include the normal judicial oversight associated with convictions,
final judgments, and court approved settlements. In addition to
providing sufficient due process, this revised ineligibility provision
(i.e., having ineligibility occur only after a conviction, a court's
final judgment, or a court approved settlement) gives those facing
ineligibility ample notice and time to prepare for ineligibility and
the resulting One-Year Transition Period discussed below. An ineligible
Insurer or Independent Producer would become eligible to rely on this
exemption again if there is a subsequent judgment reversing the
conviction or final judgement.
Timing of Ineligibility and One-Year Transition Period
Several commenters to both PTE 2020-02 and PTE 84-24 expressed
concern that the eligibility provisions would apply retrospectively and
urged the Department to confirm that ineligibility under the exemption
would occur only on a prospective basis after finalization of the
amendment to the exemption. Additionally, some commenters asserted that
the six-month period provided in the Proposed Amendment following
ineligibility would be insufficient for Insurers and Independent
Producers to prepare for any inability to provide retirement investment
advice for a fee, determine an alternative means of complying with
ERISA, and to prepare and submit an individual exemption. Another
commenter stated that providing a longer 12-month period would enable
Insurers and Independent Producers to find alternative compliant means
to help retirement investors and would enable retirement investors to
continue to receive investment recommendations in their best interest.
One commenter claimed that the sudden real or impending loss of
significant numbers of providers, or even a handful of the largest
among them, as the result of their disqualification would cause
significant disruption as Plans would have no more than six months to
find suitable replacements and would impose harm on Retirement
Investors who have hired a disqualified firm.
The Department confirms that ineligibility under Section VIII will
be prospective such that only convictions, final judgments, or court-
approved settlements occurring after the Applicability Date of this
Final Amendment will cause ineligibility. In addition, the six-month
lag period for eligibility has been replaced with the One-Year
Transition Period in Section VIII(c)(2). Accordingly, while Section
VIII(c) now provides that a party becomes ineligible upon the date of
conviction, final judgment, or court-approved settlement that occurs
after the Applicability Date of the exemption, the One-Year Transition
period provides Insurers and Independent Producers ample time in which
to prepare for the loss of the exemptive relief under PTE 84-24,
determine alternative means for compliance, prepare and protect
Retirement Investors, and apply for an individual exemption.
The Final Amendment indicates that relief under the exemption
during the
[[Page 32325]]
Transition Period is available for a maximum period of one year after
the Ineligibility Date if the Insurers or Independent Producer, as
applicable, submits a notice to the Department at <a href="/cdn-cgi/l/email-protection#f7a7a3b2cfc3dac5c3b793989bd9909881"><span class="__cf_email__" data-cfemail="3161657409051c030571555e5d1f565e47">[email protected]</span></a>
within 30 days after ineligibility begins under Section VIII(c). No
relief will be available for any transactions (including past
transactions) effected during the One-Year Transition Period unless the
Insurer or Independent Producer complies with all the conditions of the
exemption during such one-year period. The Department notes that it
included the One-Year Transition Period in the Final Amendment to
reduce the costs and burdens associated with the possibility of
ineligibility, and to give Insurers or Independent Producers an
opportunity to apply to the Department for individual prohibited
transaction exemptions with appropriate protective conditions.
The One-Year Transition Period begins on the date of the
conviction, the final judgment (regardless of whether that judgment
remains under appeal), or court approved settlement. Insurers or
Independent Producers that become ineligible to rely on this exemption
may rely on a statutory prohibited transaction exemption, such as ERISA
section 408(b)(14) and Code section 4975(d)(17), or separate
administrative prohibited transaction exemption if one is available, or
may seek an individual prohibited transaction exemption from the
Department. In circumstances where the Insurers or Independent
Producers become ineligible, the Department believes the interests of
Retirement Investors are best protected by the procedural protections,
public record, and notice and comment process associated with the
individual exemption applications process. When processing individual
exemption applications, the Department has unique authority to
efficiently gather evidence, consider the issues, and craft protective
conditions that meet the statutory standard. If the Department
concludes, consistent with the statutory standards set forth in ERISA
section 408(a) and Code section 4975(c)(2), that an individual
exemption is appropriate, Retirement Investors can make their own
independent determinations whether to engage in otherwise prohibited
transactions with the Insurers or Independent Producers.
The Department encourages any Insurers or Independent Producers
facing allegations that could result in ineligibility to begin the
individual exemption application process as soon as possible. If the
applicant becomes ineligible and the Department has not granted a final
individual exemption, the Department will consider granting retroactive
relief, consistent with its policy as set forth in 29 CFR 2570.35(d);
the Department cautions that retroactive exemptions may require
additional prospective compliance.
Form 5330
The Department received comments that expressed concern over the
imposition of ineligibility based on the Independent Producers' failure
to make the required Code section 4975 excise tax filing and to comply
with IRS Form 5330 filing requirements and excise tax payment
obligations. Several commenters stated this provision is unreasonable
and that the Department has no statutory or regulatory enforcement
authority to base ineligibility on these Code provisions and claimed
this was overreach by the Department. These commenters urged the
Department to remove this provision from the exemption.
The Department is retaining ineligibility based on failure to
correct prohibited transactions, report those transactions to the IRS
on Form 5330 or pay the resulting excise taxes imposed by Code section
4975 in connection with non-exempt prohibited transactions involving
investment advice as defined under Code section 4975(e)(3)(B). The
excise tax is the Congressionally imposed sanction for engaging in a
non-exempt prohibited transaction and provides a powerful incentive for
compliance with the participant-protective terms of this exemption.
Insisting on compliance with the statutory obligation to pay the excise
tax provides an important safeguard for compliance with the tax
obligation when violations occur and focuses the institution's
attention on instances where the conditions of this exemption have been
violated, resulting in a non-exempt prohibited transaction. Moreover,
the failure to satisfy this condition calls into question the
Independent Producer's commitment to regulatory compliance, as is
critical to ensuring adherence to the conditions of this exemption
including the Impartial Conduct Standards.
By including this provision in the Final Amendment, the Department
does not claim authority to impose taxes under the Code, and leaves
responsibility for collecting the excise tax and managing related
filings to the IRS. Since an obligation already exists to file Form
5330 when parties engage in non-exempt prohibited transactions, the
Department is merely conditioning relief in the exemption on their
compliance with existing law. The condition provides important
protections to Retirement Investors by enhancing the existing
protections of PTE 84-24.
Moreover, as discussed above, ineligibility under Section
VIII(a)(2)(C) would only occur following a court finding that an
Independent Producer engaged in a systematic pattern or practice of
failing to correct prohibited transactions, report those transactions
to the IRS on Form 5330 or pay the resulting excise taxes imposed by
Code section 4975. Imposing ineligibility only after such
determinations in connection with court proceedings removes the
Department from the determination process and provides ample due
process.
Alternative Exemptions
An Insurer or Independent Producer that is ineligible to rely on
this exemption may rely on a statutory or separate administrative
prohibited transaction exemption if one is available or may request an
individual prohibited transaction exemption from the Department. To the
extent an applicant requests retroactive relief in connection with an
individual exemption application, the Department will consider the
application in accordance with its retroactive exemption policy as set
forth in 29 CFR 2570.35(d). The Department may require additional
prospective compliance conditions as a condition of providing
retroactive relief. A few commenters also expressed concern that the
Alternative Exemptions process was not sufficient. One commenter in
particular expressed concern with the length and expense of seeking to
obtain an individual exemption, claiming this would result in harm to
Plans.
As discussed above, the violations that would trigger ineligibility
are serious, call into question the parties' willingness or ability to
comply with the obligations of the exemption, and have been determined
in court supervised proceedings. In such circumstances, it is important
that the parties seek individual relief from the Department if they
would like to continue to have the benefit of an exemption that permits
them to engage in conduct that would otherwise be illegal. As part of
such an on the record process, they can present evidence and arguments
on the scope of the compliance issues, the additional conditions
necessary to safeguard Retirement Investor interests, and their ability
and commitment to comply with protective conditions designed to ensure
prudent advice and avoid the harmful
[[Page 32326]]
impact of dangerous conflicts of interest.
One commenter also speculated that the loss of the exemption based
on ineligibility would effectively require the Insurer to acknowledge
fiduciary status in connection with any request for an individual
exemption. The Department notes, however, that it would base any
decisions on whether to grant such an exemption and the possible
conditions it would include in such exemption, including the need for a
fiduciary acknowledgment, on the particular facts and circumstances
that were presented by an applicant.
Recordkeeping
Section IX provides that Independent Producers and Insurers must
maintain for a period of six years from the date of the covered
transaction records demonstrating compliance with this exemption and
make such records available to the extent permitted by law, including
12 U.S.C. 484, to any authorized employee of the Department or the
Department of the Treasury, including such employees of the Internal
Revenue Service. While the Department had proposed a broader
recordkeeping condition affording greater public access to the records,
the Department has determined that the recordkeeping provisions for
advice under PTE 84-24 should be narrowed consistent with those in PTE
2020-02.
Although the proposed broader recordkeeping condition was
consistent with other exemptions, the Department understands
commenters' concerns about broader access to the documents and has
concern that broad access to the documents could have a
counterproductive impact on the formulation and documentation of
appropriate firm oversight and control of recommendations by
Independent Producers. Therefore, the Department has determined this
narrower recordkeeping language satisfies ERISA section 408(a) and Code
section 4975(c)(2). However, the Department intends to monitor
compliance with the exemption closely and may, in the future, expand
the recordkeeping requirement if appropriate. Any future amendments
would be preceded by notice and an opportunity for public comment.
Executive Order 12866 and 13563 Statement
Executive Orders 12866 \40\ and 13563 \41\ direct agencies to
assess all costs and benefits of available regulatory alternatives. If
regulation is necessary, agencies must choose a regulatory approach
that maximizes 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.
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\40\ 58 FR 51735 (Oct. 4, 1993).
\41\ 76 FR 3821 (Jan. 21, 2011).
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Under Executive Order 12866, ``significant'' regulatory actions are
subject to review by the Office of Management and Budget (OMB). As
amended by Executive Order 14094,\42\ entitled ``Modernizing Regulatory
Review,'' section 3(f) of Executive Order 12866 defines a ``significant
regulatory action'' as any regulatory action that is likely to result
in a rule that may: (1) have an annual effect on the economy of $200
million or more (adjusted every three years by the Administrator of the
Office of Information and Regulatory Affairs (OIRA) for changes in
gross domestic product); or adversely affect in a material way the
economy, a sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or State, local, Territorial, or
Tribal governments or communities; (2) create a serious inconsistency
or otherwise interfere with an action taken or planned by another
agency; (3) materially alter the budgetary impacts of entitlement
grants, user fees, or loan programs or the rights and obligations of
recipients thereof; or (4) raise legal or policy issues for which
centralized review would meaningfully further the President's
priorities or the principles set forth in the Executive order, as
specifically authorized in a timely manner by the Administrator of OIRA
in each case. It has been determined that this amendment is significant
within the meaning of section 3(f)(1) of the Executive Order.
Therefore, the Department has provided an assessment of the amendment's
costs, benefits, and transfers, and OMB has reviewed the rulemaking.
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\42\ 88 FR 21879 (Apr. 6, 2023).
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Paperwork Reduction Act
In accordance with the Paperwork Reduction Act of 1995 (PRA) (44
U.S.C. 3506(c)(2)(A)), the Department solicited comments concerning the
information collection requirements (ICRs) included in the proposed
rulemaking. The Department received comments that addressed the burden
estimates used in the analysis of the proposed rulemaking. The
Department reviewed these public comments in developing the paperwork
burden analysis and subsequently revised the burden estimates in the
amendments to the PTEs discussed below.
ICRs are available at <a href="http://RegInfo.gov">RegInfo.gov</a> (<a href="https://www.reginfo.gov/public/do/PRAMain">https://www.reginfo.gov/public/do/PRAMain</a>). Requests for copies of the ICR or additional information
can be sent to the PRA addressee:
By mail: James Butikofer, Office of Research and Analysis, Employee
Benefits Security Administration, U.S. Department of Labor, 200
Constitution Avenue NW, Room N-5718, Washington, DC 20210
By email: <a href="/cdn-cgi/l/email-protection#0b6e69786a25647b794b6f6467256c647d"><span class="__cf_email__" data-cfemail="2643445547084956546642494a08414950">[email protected]</span></a>
The OMB will consider all written comments that they receive within
30 days of publication of this notice. Written comments and
recommendations for the information collection should be sent to
<a href="https://www.reginfo.gov/public/do/PRAMain">https://www.reginfo.gov/public/do/PRAMain</a>. Find this particular
information collection by selecting ``Currently under 30-day Review--
Open for Public Comments'' or by using the search function.
As discussed in detail above, PTE 84-24, as amended, will exclude
compensation received as a result of the provision of investment advice
from the existing relief provided in Section II, which will be
redesignated as Section II(a) and add new Sections VI and -XI and
redesignate the definitions as Section X, which will provide relief for
investment advice limited to the narrow category of transactions in
which an 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.
[[Page 32327]]
Financial institutions and investment professionals that engage in
all other investment advice transactions, including those involving
captive or career insurance agents, will rely on PTE 2020-02 to receive
exemptive relief for investment advice transactions. PTE 84-24 will
require certain new disclosures, annual retrospective reviews, and
compliance 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.\43\
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\43\ For a more detailed discussion of the marginal costs
associated with the Amendments to PTE 84-24, refer to the Regulatory
Impact Analysis (RIA) in 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 will
perform the tasks associated with the ICRs at an hourly wage rate of
$165.29 for an Independent Producer, $65.99 for clerical personnel, and
$165.71 for a legal professional, and $133.24 for a senior
executive.\44\
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\44\ 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/dolgo
[…truncated; see source link]Indexed from Federal Register on April 25, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.