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VI. Principal Regulatory Developments Affecting Insurance Companies
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b. Best Interest Contract Exemption
The Proposed Regulations also include a new exemption from the prohibited transaction rules under ERISA and the Code—the Best Interest Contract Exemption. If the conditions of the Best Interest Contract Exemption are satisfied, certain investment advice fiduciaries, including insurance agents, brokers and consultants, and financial institutions would be allowed to receive fees and compensation that, without the exemption, would be prohibited.
The Best Interest Contract Exemption applies only to advice given to non-participant directed small plans (fewer than 100 participants), plan participants and IRAs, and only for advisor services provided in connection with the purchase or sale of certain assets (including insurance and annuity contracts and mutual funds). The exemption also has several onerous conditions, including written contract requirements and extensive disclosure requirements.
c. Impact of Amendment to PTE 84-24
PTE 84-24 provides relief from the prohibited transaction rules under ERISA and the Code for the receipt of sales commissions by “fiduciary” insurance advisors in connection with the sale of (among other products) fixed and variable insurance products to plans and IRAs, provided that certain disclosure requirements are satisfied. However, for IRAs, relief under PTE 84-24 will not be available for mutual fund shares or insurance products that are considered securities under federal securities laws (e.g., variable annuity contracts and other annuity contracts).
Under PTE 84-24 as amended, the insurance advisor and insurance company will need to adhere to the “Impartial Conduct Standard,” which includes acting in the best interest of plans and IRAs when providing advice, refraining from issuing any misleading statements concerning recommended investments, fees and material conflicts of interest, and other relevant matters. As noted, insurance advisors and their affiliates will be able to receive commissions (including renewal fees and trailers), but not revenue sharing payments or administrative and marketing fees. As a consequence of the
amendment to PTE 84-24, sales of variable annuity products to IRAs would have to rely on the Best Interest Contract Exemption described above.
d. Expected Publication Date for the Final Fiduciary Rules
WhiletheDOLhasnotprovidedadefinitivepublicationdate, it is expected that the final fiduciary rules will be published in the Federal Register in late first quarter of 2016, or early in the second quarter of 2016. It is our understanding that the DOL intends for any final rules to become effective prior to the end of the Obama administration on January 20, 2017. We will circulate a client alert once the rules are finalized and published in the Federal Register.
H. Other U.S. Regulatory Developments
1. Cybersecurity
After emerging as a hot topic at the end of 2014, the topic of cyber risk and cybersecurity has continued to be a major area of interest in 2015, with developments at the NAIC, federal and state levels.
a. NAIC Developments
In December 2015, the NAIC adopted the NAIC Roadmap for Cybersecurity Consumer Protections (the “Roadmap”). The Roadmap is intended to create standards and protocols for consumers if their personal information is compromised and includes the consumer’s right to know the kinds of information maintained by an insurer, and to receive timely notice of a data breach as well as assistance from the insurer in addressing issues arising from such data breach. Interested parties expressed objections to the Roadmap throughout the drafting process due to concerns that it could confuse consumers and lead them to think they are protected in ways in which no protection currently exists. As a result of such concerns, the Roadmap’s name was changed from the “Cybersecurity Bill of Rights,” prior to its adoption.
The NAIC has made clear that the Roadmap is a starting point for converting the consumer protections set forth in the Roadmap into a new full NAIC Model Law (the “Cyber Model”). However, the adoption of the Roadmap itself did not
Developments and Trends in Insurance Transactions and Regulation 2015 Year in Review