Muddy Waters: DOL Required PTE 84-24 forms

[scagnt83]

So this new PTE form requirement for exempted fiduciary transactions is interesting. (PTE stands for Prohibited Transaction Exemption)

Basically, if you and the client plan to have an "ongoing relationship" after the sale. You need a PTE Disclosure form signed by the client.

What is on this form?
Comp, conflicts of interest, surrender charges, MVAs, etc.

Who provides this form?
The agent provides and retains it. Its not part of new biz paperwork.

What is the penalty for not doing this form??
15% per year excise tax!! (to the agent).
PLUS the transaction must be reversed... if not reversed before the first 15% excise tax.... an additional 100% excise tax is applied. (to the agent)

That means on a 7 year annuity, if it was not reversed, you would owe the DOL 205% of the initial premium!!


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So to summarize, if you are dealing with IRA, 401k, or Pension funds.... and you intend to have an ongoing client/agent relationship past the point of sale (such as yearly reviews).... you must have the client sign this form.

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Here is Great Americans summary of the issue:

• Does the client’s and financial professional’s conduct show that the purchase was intended as a one-time sales transaction where the client was not relying primarily on the advice of the financial professional and no ongoing relationship was intended?

The DOL’s interpretation means the following recommendations may constitute fiduciary investment advice if the parties' conduct satisfies the DOL’s five-part test:

• Recommendations to rollover assets from an ERISA plan into an IRA.
• Recommendations about making rollovers or annual contributions to an IRA.
• Recommendations about transferring funds from one IRA to another.

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Yeah, its just another form to sign. But this seems like a big step up in enforcement of Fiduciary standards.

Also notice how the carriers seem to be "hands off" on this one. Basically saying "you need to do this, but we arent doing it for you or taking responsibility for monitoring it".

Which is a HUGE sea change in regulatory compliance within the non-registered annuity world.

They are at least providing example forms for agents to use. But they still need to be amended and customized to an extent for each client or product.

Also, this "Prohibited Transaction Exemption" is not set in stone. The DOL could decide to not allow it anymore at some point.

Also, getting a client to sign a "Prohibited Transaction Exemption" should bring up some major questions from the client... such as... "why is this a "prohibited transaction""?

It seems the end game is needing your 65 at some point in the next decade.

 

[DHK]

To me, an "ongoing relationship" should be spelled out in some kind of engagement agreement. Probably best to have one anyway. I'm already with an RIA, so I'm already half way there anyway.

John Olsen just updated his book to include a lot of these things. Every advisor who deals with annuities, life insurance, and AUM (on any level) should get it:

Here's what he said about his latest edition:
"I have just completed the Second Edition of my book "The Advisor as Defendant: How to Keep from Being Sued Successfully". This version is updated and greatly expanded, now including material on the SEC's "Reg BI", the SECURE Act, and the NAIC "Suitability of Annuity Transactions" Model Regulation #275 of 2020, along with the Dept. of Labor's new PTE 2020-02. If you are an advisor working with life insurance or annuity products, this might be a lifesaver for you. It is up on Amazon at https://lnkd.in/eJ6tJRWT. Both paperback and e-book are for sale."

Amazon product ASIN B09QHD7M9K

 

[scagnt83]

To me, an "ongoing relationship" should be spelled out in some kind of engagement agreement. Probably best to have one anyway. I'm already with an RIA, so I'm already half way there anyway.

I get what you mean.

Based on the DOLs wording, any type of contact about the product after the initial sale would constitute an "ongoing relationship". Not just annual reviews... but even the client just calling you to ask a question or get a form emailed them would count.

Also, most annual statements have the agents contact info and say "for additional questions, please contact your agent at: xxxx" . So there is essentially a "written agreement" baked into the annual statement ... at least in the eyes of the DOL.

 

[Allen Trent]

I have been very confused on this. I thought DOL rule that was implemented went away for fixed products.

To me, an "ongoing relationship" should be spelled out in some kind of engagement agreement.

it will be spelled out...............but not until later by the courts or DOL. It really shouldnt be that hard to have some written standards. But the entire intent was to make all Annuities & retirement accounts be at the Fiduciary standard.

Is highest interest or the rating of the company more important as a fiduciary. If Colorado Bankers had stayed in business, some would say you hurt the client by putting them in a lower interest rate product. if you had put them in the colorado bankers product & it has now failed you certainly would be seen as not acting as a fiduciary for them.

This will always be determined after the fact...........it seems

 

[scagnt83]

I have been very confused on this. I thought DOL rule that was implemented went away for fixed products.


it will be spelled out...............but not until later by the courts or DOL. It really shouldnt be that hard to have some written standards. But the entire intent was to make all Annuities & retirement accounts be at the Fiduciary standard.

Is highest interest or the rating of the company more important as a fiduciary. If Colorado Bankers had stayed in business, some would say you hurt the client by putting them in a lower interest rate product. if you had put them in the colorado bankers product & it has now failed you certainly would be seen as not acting as a fiduciary for them.

This will always be determined after the fact...........it seems

I think it really boils down to the ongoing relationship. There is a "5 part test" to determine Fiduciary Status. But the annuity carriers really seem focused on if there is ongoing guidance or not.

The DOL has a lot of seemingly contradictory statements about their definition.

On the surface it seems most insurance agents would not meet the 5 part test. But then the DOL has certain statements in their clarification such as looking at the actual title used in the Annual Statements to see if they are holding themselves out as an "Advisor" or not. Or if they hold themselves out as giving "financial planning advice", etc.

Now, I know for a fact multiple annuity carriers list the agent as the "Advisor". Right there we have an issue. And we all know plenty of agents market themselves as giving "retirement planning advice" in various forms and fashions.

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Now it seems that this PTE 84-24 Form exempts the agent from being considered a Fiduciary. It seems carriers are sending out boilerplate forms for agents to use as a guideline and customize as needed.

But the DOL says this:

In the FAQs, the DOL notes that it is reviewing its regulation of fiduciary advice more generally, which may include amending or revoking parts of PTE 84-24 to eliminate variable annuities and fixed indexed annuities from its coverage. It may also define “commission”; if so, it is anticipated that the definition would be narrow. The DOL may also add a best interest standard to the exemption. If the DOL takes these approaches, the effect could be that IMOs and other insurance intermediaries may, as a practical matter, need to apply for individual exemptions as “financial institutions” under PTE 2020-02 to manage compliance with that exemption.

In the context of variable annuity sales, which would be made by agents who are also licensed as broker-dealer representatives, it may be more convenient to rely on PTE 2020-02 since broker-dealers will already be complying with the SEC’s Reg BI and will likely need to utilize PTE 2020-02 for other business activities.

So things could be changing even more in the near future.

Here are some good articles about it:

DOL Reconsiders Who Can Be Considered a Fiduciary | PLANADVISER

Retirement Account Rollovers: PTE 2020-02 vs. PTE 84-24 | Faegre Drinker Biddle & Reath LLP (this guy is one of the foremost experts in ERISA Law)

Here is the actual DOL Regs if you want to really get in the weeds on this:
https://www.dolfiduciaryrule.com/portalresource/pte-84-24-with-amended-applicability-dates.pdf

 

[DHK]

Fred Reish is one of the best and I connected and follow him on LinkedIn.

My thing is... I'm not going to live or produce in fear. There's always something out there. I'm going to continue to serve my clients and prospects to the best of my ability, document everything, and I doubt I'll ever have an issue.

The #1 reason clients sue is when they feel ignored or even betrayed in the relationship. Everything else in this playlist... I can continue to adapt and use for best practices, but as long as I'm doing it well for the client and I'm responsive to their requests for information... there won't be any issues, regardless of how many pieces of paper require signatures.

 

[DHK]

I just posted about Ohio National's interpretation of PTE 2020-02 DOL fiduciary requirements here:

https://insurance-forums.com/community/threads/dol-fiduciary-rule-pte-2020-02.107720/

They didn't interpret anything about an ongoing relationship other than "providing advice on a regular basis"? I'm no attorney, but I interpret that to mean managing the plan on an ongoing basis, which every agent selling annuities and life insurance should be making that commitment to help ensure the success of these plans.