DOL Releases Two Conflict of Interest Rule FAQs and Proposes Rule on the Best Interest Contract Exemption for Insurance Intermediaries

The DOL has released multiple documents relating to the Conflict of Interest Rule (the Rule). As background, the Rule amends ERISA’s definition of ‘fiduciary’ by considering more communications to be investment advice that renders the person providing that advice a fiduciary. Additionally, the DOL introduced new prohibited transaction exemptions (PTEs) and amended others in order to permit common compensation structures and to cover certain types of transactions.

On Jan. 13, 2017, the DOL released the second set of FAQs on the Rule. This FAQ addresses technical questions about the interpretation of the rule. The FAQs are divided into sections on the following topics:

  • Qs1-7 address which communications constitute a fiduciary recommendation;
  • Qs8-15 clarifiy the distinction between investment education and fiduciary recommendations;
  • Qs16-20 explain which communications are considered general communications or fall under the ‘hire me’ exception;
  • Qs21-29 describe the independent fiduciary exception and how it applies to certain representations;
  • Qs30-35 expound on the ‘platform exception’ that applies to service providers who may select and monitor investments for plan fiduciaries.

Conflict of Interest Rule FAQs Part II »

Consumer Protections for Retirement Investors – FAQs on Your Rights and Financial Advisers
On Jan. 13, 2017, the DOL also released a set of FAQs geared towards consumers. Specifically, these FAQs are designed as a resource that the DOL is providing to assist retirement investors in understanding the Rule and properly questioning their financial advisers.

The FAQs are divided into sections on the background of the Rule, on Advisers, on IRAs, 401(k) Plans and HSAs, and on Timing. The DOL also lists various government resources that consumers can go to for additional information on investments and investment advisers. At the end of the FAQs, the DOL also provides an appendix of questions that investors can ask their financial advisers.

Although these FAQs are geared towards individual retirement investors, it would be helpful for employers to familiarize themselves with these concepts in the event that they receive questions on this subject from their employees.

FAQs on Your Rights and Financial Advisers »

Proposed Best Interest Contract Exemption for Insurance Intermediaries
On Jan. 19, 2017, the DOL released a proposed rule explaining the Best Interest Contract (BIC) exemption for insurance intermediaries. As background, the BIC exemption is the main exemption that will cover investment advice to individuals, and allow advisers to receive compensation through transactions that would otherwise be considered prohibited. These proposed rules would allow certain insurance intermediaries to receive compensation connected to sales of fixed annuities.

Insurance intermediaries are entities that support insurance agents by recruiting and training them to distribute certain insurance products. This exemption would specifically apply to fixed annuity contracts. As long as the insurance intermediary meets the definition of a “financial institution”, then the insurance agents they contract with would be allowed to receive compensation connected to the sale of fixed annuities.

Insurance intermediaries will meet the definition of “financial institution” if they have a written contract with the insurance company and the adviser who will be recommending and distributing fixed annuities. Further, the insurance intermediary must have $1.5 billion in premiums from fixed annuities for each year of the last three years.

Similar to the requirements under the BIC exemption, insurance intermediaries relying on this proposed exemption would have to acknowledge their fiduciary status (and the fiduciary status of their advisers) in a written contract. They will also have to adhere to basic standards of impartial conduct such as giving prudent advice that is in the customer’s best interest, avoiding misleading statements and only receiving reasonable compensation.

The DOL proposes that this exemption be available to insurance intermediaries on April 10, 2017, with transition relief available between that time and Aug. 15, 2018.

Proposed Best Interest Contract Exemption for Insurance Intermediaries »

Given the inauguration of the new administration, it’s hard to know what the future of the Conflict of Interest rule will be. However, we will continue to monitor any developments and discuss them in Compliance Corner.