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PTEs Under the DOL Fiduciary ‘Package’

Having dealt with the requirements of ERISA’s prudent man rule and of the best-interest standard of care for IRAs and plans, noted ERISA attorney Fred Reish now examines the requirements of the two prohibited transaction exemptions.

In his most recent blog post, Reish reminds that the two exemptions that will apply to recommendations of investment products and services and insurance products to plans, participants and IRAs are:

  • Prohibited Transaction Exemption 84-24 (which covers recommendations of insurance products, including annuities and life insurance policies); and

  • the Best Interest Contract Exemption (BICE), which can be used for sales of any investment products and services or any insurance products (including those covered by 84-24) during the transition period.

Reish notes that not all advisory services require the use of an exemption (notably, level fee). But if the advisor (and here Reish uses the adviser spelling adopted in the DOL fiduciary regulation) or any affiliated or related party, does receive additional compensation, that would be a financial conflict of use of one of the exemptions: BICE or 84-24.

‘Common’ Threads

Reish observes that the most common exemption will be the Best Interest Contract Exemption, though during the transition period, that exemption requires only that the adviser (and the adviser’s financial institution, e.g., the RIA firm or broker-dealer) “adhere” to the Impartial Conduct Standards (ICS).

Here he explains that the use of the word “adhere” means only that the adviser and financial institution must comply with those requirements. “There is not a requirement to notify the plan, participant or IRA owner of those requirements, nor is there a requirement during the transition period to enter into a Best Interest Contract.”

On the other hand, Reish explains that 84-24 does impose some written requirements. For example, he says the insurance agent or broker must disclose his initial and recurring compensation, expressed as a percentage of the commission payments. And the plan fiduciaries or IRA owners must, in writing, acknowledge receipt of that information and affirm the transaction. On top of that, though, the agent must also “adhere” to the Impartial Conduct Standards.

Home Office Implications

Reish takes the position that between now and June 9, financial institutions (such as broker-dealers and IRA firms) should focus on the fiduciary processes that will be implemented by the home offices (for example, which mutual fund families and insurance products can be sold to “qualified” accounts such as IRA plans) since, in a sense, those institutions will be co-fiduciaries with the advisers and, therefore, share responsibility for the recommendations that are made to the qualified accounts.

Additionally, he says that the home offices of financial institutions need to focus on the training of their advisers to comply with the prudent process requirement imposed by the fiduciary rules, including documentation of those processes. Moreover, while he acknowledges that part of a prudent process will be similar to what is currently required under the suitability and know-your-customer rules, these new fiduciary standards place greater emphasis on certain factors, such as the costs of investments and the quality of the investment management.

Regarding the reasonable compensation requirement, Reish states that the burden of proof is on the person claiming that the compensation was reasonable, the broker-dealer, the RIA firm, and the agent or insurance adviser.

Finally, with regard to 84-24, Reish says that the required disclosure and consent forms need to be developed and agents need to be educated on the use of the forms, including the disclosure and consent requirements.