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Impact of the DOL’s fiduciary rule on fixed annuity sales

On June 9th, a portion of the Department of Labor’s revised fiduciary rule goes into effect and everyone earning commissions on the sale of IRA fixed annuities will be impacted. 

First, a little background information.   For many years, the Internal Revenue Code has prohibited ‘fiduciaries” from engaging in self-dealing transactions (example: receiving a commission) with an IRA. A person would be considered a fiduciary if they provided “investment advice” to an IRA. A violation of these prohibited transaction rules can result in significant penalties. 
In the past, it was relatively easy for an insurance agent to avoid being considered a fiduciary because in most cases, their sales activities never met the technical definition of “investment advice”. That all changed with the Department of Labor’s new fiduciary rule.
New DOL fiduciary rule. The DOL expanded who qualifies as a fiduciary by broadening the definition of investment advice to include any person who makes a recommendation for a fee or other compensation concerning the advisability of acquiring, holding, or disposing of investment property in an IRA. So, if an agent receives a commission or fee on the sale of an IRA fixed annuity, they are now a fiduciary.
Once fiduciary status is triggered, certain compensation arrangements are prohibited, most notably commissions. However, there are Prohibited Transaction Exemptions (PTE) that still allow for receipt of commissions provided the terms of the PTE are followed.
PTE 84-24. This is the exemption that applies to traditional fixed annuity sales, both deferred and immediate. (It can also be used for fixed index annuity sales during a transition period that ends December 31, 2017.) We’re only going to discuss the requirements that apply starting June 9th through the end of the year. There may be additional requirements beginning in 2018.
The basic goal of PTE 84-24 is to impose an impartial conduct standard. There are three components to this standard:
1.      Act in the best interests of the client (duty of loyalty and prudence);
2.     Avoid misleading statements;
3.     Receive no more than reasonable compensation.
Compliance with PTE 84-24. One important point to remember is that compliance with the exemption is the responsibility of the agent and not the company. Most companies will offer templates and disclosure forms to help you comply, but compliance is your responsibility.
Complying with the exemption will be part disclosure, part documented analysis. At a minimum, you will need to disclose to your client:
1.      Your relationship as an independent agent with the company;
2.     Your sales commission
3.     A description of fees, charges, etc.
4.     Any conflicts of interest you may have in addition to the receipt of commission.
You will want your client to sign this form acknowledging receipt and approving the sale of the annuity to their IRA.
In terms of analysis, you will want to document your client’s needs, choice of products to meet those needs, and the basis of your product recommendation. 
To assist you in your compliance efforts, we will make sample forms available on our website as soon as they are available. Also, some companies will offer their own disclosures forms based on product being sold. 


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