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VI. Principal Regulatory Developments Affecting Insurance Companies
3. DOL Re-Proposed Fiduciary Rule
On April 14, 2015, the U.S. Department of Labor (the “DOL”) issued proposed regulations (the “Proposed Regulations”) clarifying who would be considered a “fiduciary” of an employee benefit plan under the Employee Retirement Income Security Act of 1974 (“ERISA”) by virtue of providing investment advice to a plan or its participants. The Proposed Regulations also apply to the definition of a “fiduciary” for purposes of IRAs under the Internal Revenue Code of 1986 (the “Code”). Further, the Proposed Regulations propose two new, and amend certain existing, class exemptions from the prohibited transaction rules (including Prohibited Transaction Exemption (“PTE”) 84-24, which has particular relevance to the insurance industry for the sale of insurance products and mutual funds by “fiduciary” insurance agents, brokers and consultants).
The Proposed Regulations, if finalized, will likely transform the way financial services firms—including insurance companies— market and sell their products and services. Under the proposed fiduciary definition, most insurance advisors would be considered fiduciaries and required to comply with the “best interest” standard of care when advising IRAs and small plans. Advisors to these plans and IRAs will need to examine whether their existing compensation structures would remain compliant if final regulations are adopted.
a. Re-Proposed Fiduciary Definition
In issuing the Proposed Regulations, the DOL sought to broaden the scope of the types of advice relationships that would give rise to fiduciary status, as compared to the current regulations. In support of the Proposed Regulations, the DOL cited the increased significance of the financial advice being provided to employee benefit plans and their participants and the increasing share of retirement funds that are held by participant-directed plans and IRAs.
The DOL issued the current regulations in 1975, employing a five-part test for determining whether a person is providing investment advice for a fee—a so-called investment advice
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review
fiduciary. It is the DOL’s position that the current regulations have the effect of improperly narrowing the statutory scope of the definition. The current regulations provide that a person without discretionary authority or control with respect to the management of a plan or its assets is a fiduciary if that person renders advice as to the value of securities or other property or make recommendations as to the advisability of investing in, purchasing or selling securities or other property on a regular basis pursuant to a mutual agreement, arrangement or understanding with the plan or plan fiduciary that the advice will serve as a primary basis for investment decisions of the plan’s assets and that the advice is individualized and particularized for the plan.
The Proposed Regulations clarify and broaden the definition of fiduciary investment advice, but also provide for specific carve-outs for particular types of communications that should not be considered fiduciary in nature. Under this new definition, a person would be deemed to be an investment adviser fiduciary if, for a fee, that person provides investment or investment management recommendations or appraisals to an employee benefits plan, a plan fiduciary, participant or beneficiary or an IRA owner or fiduciary, and either (a) acknowledges the fiduciary nature of the advice, or (b) acts pursuant to an agreement, arrangement or understanding that the advice is “individualized to, or specifically directed to” the advice recipient.
The DOL recognized that the revised definition of fiduciary advice could be overbroad, so the Proposed Regulations include several “carve outs” to the general definition, including, among others, (1) statements or recommendations made to large plan investors with financial expertise, (2) marketing or making available a platform of investment alternatives to be selected by a plan fiduciary for an individual account plan, and (3) information and materials that constitute “investment education.”
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