Best Interest Revisions to the Annuity Suitability Model and DOL Rule

Overview

On February 13, 2020, the National Association of Insurance Commissioners (“NAIC”) adopted revisions to its Suitability in Annuity Transactions Model Regulation (#275) that impose a higher best interest standard of care for annuity sales. Similar to the Security and Exchange Commission’s (“SEC”) Regulation Best Interest (“Reg BI”), it requires financial professionals to act in the best interest of the consumer without putting the financial professional’s or insurer’s financial interest ahead of the consumer.  Best interest means setting aside any personal beliefs or biases and working for the good of the consumer at all times. It goes beyond recommending what may meet a consumer’s stated needs and objectives (suitability).  The new rule consists of four core obligations: Care, Disclosure, Conflict of Interest and Documentation.

Care Obligation

A financial professional must use “Reasonable Diligence, Care and Skill” when making a recommendation by:

 

  • Knowing the customer’s financial situation, insurance needs and financial objectives;
  • Understanding all product and investment options available to sell;
  • Having a reasonable basis to believe the recommendation addresses the consumer’s financial situation, objectives, and insurance needs;
  • Clearly communicating the basis of the recommendation.

 

You must gather and consider additional information when completing a “consumer profile” form. At a minimum, you must collect:

 

  • age
  • annual income
  • financial situation and needs including debts and other obligations
  • financial experience
  • insurance needs
  • financial objectives
  • intended use of the annuity
  • financial time horizon
  • existing assets
  • liquidity needs
  • liquid net worth
  • risk tolerance - including a willingness to accept non-guaranteed elements in the annuity
  • financial resources used to fund the annuity
  • tax status

 

To enable Global Atlantic to review recommendations to determine if the product would effectively address the consumer’s needs and objectives, we have added additional data fields to our Annuity Suitability Questionnaire and Acknowledgement form in order to ensure relevant data elements required under the revised regulation are collected at the time of solicitation. While the revised regulation enhances the financial professional’s obligations to consumers, the financial professional is not required to consider products outside the scope of his/her authority and license, nor does it create a fiduciary duty.

Disclosure Obligation

Under the revised regulation, you must take extra care to disclose your role in recommending the purchase of a Global Atlantic annuity including:

 

  • A description of the scope and terms of the relationship you have with the consumer and your role in the transaction;
  • An affirmative statement on whether you are licensed and authorized to sell fixed annuities, fixed indexed annuities, life insurance, mutual funds, stocks and bonds, and CDs;
  • An affirmative statement describing the insurers that you are appointed with;
  • A description of how you will be paid as a result of a contract purchase including any non-cash compensation (trips, material rewards);
  • Notice of the consumer's right to request additional information regarding your compensation.

 

You can use the appropriate form below (or use one of your own) to provide these important disclosures.

 

Appendix A Disclosure Form

MN Disclosure Form (MN sales only)

Conflict of Interest Obligation

Under the revised NAIC model regulation, the financial professional must identify and avoid or reasonably manage and disclose material conflicts of interest. Material conflicts of interest include a financial interest that a reasonable person would expect to influence the impartiality of a recommendation but does not include cash or non-cash compensation.

Documentation Obligation

At the time of solicitation, the financial professional must document any recommendation and its basis in writing. If the consumer refuses to provide consumer profile information, the financial professional must obtain a statement signed by the consumer that documents their refusal. Furthermore, if the consumer decides to buy an annuity that is not based on the financial professional's recommendation, the financial professional must obtain a statement signed by the consumer acknowledging this. Please note that Global Atlantic will not accept an application for annuity purchase absent consumer profile information.

Prohibited Transaction Exemptions

The DOL Rule

In 2020, the Department of Labor (“DOL”) finalized Prohibited Transaction Exemption 2020-02 – Improving Investment Advice to Workers and Retirees (“PTE 2020-02”) that can be used by fiduciaries providing investment advice to retirement plans and individual retirement accounts for a fee.. PTE, 2020-02, is targeted at rollover recommendations, which remove assets from a retirement plan and roll them over to an IRA or remove assets from a current IRA and transfer them to another IRA (“Rollover Recommendations”). It became effective on February 16, 2021 (the “Rule”).

A person who provides “investment advice” and receives a fee or other compensation for such advice is considered a fiduciary under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code of 1986 the (“Code”) ERISA and the Code generally prohibit fiduciaries from receiving compensation in connection with transactions involving qualified retirement plans and IRAs unless an exemption applies.

With the issuance of PTE 2020-02, the DOL fundamentally changed the understanding of who would qualify as a fiduciary and therefore need to rely upon an exemption. With this shift, financial professionals making Rollover Recommendations qualify as fiduciaries under the Rule and will need to rely on an exemption to receive compensation.

With PTE 2020-02, the DOL added an additional pathway for the receipt of conflicted compensation to the list of available exemptions. PTE 84-24 has been available for transactions that involve the sale of insurance or annuity contracts to qualified plans, including Rollover Recommendations.

Although it has been available since the late 1970’s, financial professionals have not had to rely on PTE 84-24 because they were not considered fiduciaries; however, the shift in guidance issued by the DOL with PTE 2020-02 changed that analysis.

Which PTE will I need to utilize?

This will depend on a number of factors.

PTE 2020-02:

This exemption may be available to you if you are affiliated with a Financial Institution (Registered Investment Advisor (“RIA”), broker-dealer, bank). It involves significant requirements, additional disclosure to the client, retention requirements, and supervisory requirements. If you are not affiliated with a Financial Institution such as those listed above, you cannot utilize PTE 2020-02. Instead, you will need to use another prohibited transaction exemption (“PTE”) in order to receive conflicted compensation (please see discussion of PTE 84-24 below).

Summary of PTE 2020-02

  • The exemption provides conditions under which Financial Institutions and their advice, fiduciaries may receive reasonable compensation if the following conditions are met: Adherence to the Impartial Conduct Standards, which requires that: (i) investment advice be provided in the “best interest” of the retirement investor; (ii) any compensation received by the Financial Professional, directly or indirectly, be reasonable; and (iii) any statements to the retirement investor about the recommended transaction or other relevant matters are not materially misleading;

  • Written Disclosure: Prior to engaging in a transaction pursuant to the exemption, the Advice Fiduciaries1 must provide written disclosure to the retirement investor: (i) acknowledging that the Financial Institution and its Financial Professionals are fiduciaries under ERISA and/or the Internal Revenue Code, as applicable; (ii) describing the services to be provided; and (iii) describing any material conflicts of interest;

  • Rollover Analysis and Disclosure: The Financial Professional must document and disclose the specific reasons that their recommendation to roll over assets is in the retirement investor’s best interest. This requirement extends to recommended rollovers from an ERISA plan to another ERISA plan or to an IRA; from an IRA to an ERISA plan or to another IRA; or from one type of account to another (e.g., from a commission-based account to a fee-based account);

  • Policies and Procedures: The Financial Institution must establish, maintain, and enforce written policies and procedures prudently designed to ensure that the Financial Institution and its Financial Professionals comply with the Impartial Conduct Standards; and

  • Retrospective Review: The Financial Institution must conduct a retrospective review, at least annually, that is reasonably designed to assist the Financial Institution in detecting and preventing violations of, and achieving compliance with, the Impartial Conduct Standards and the policies and procedures governing compliance with PTE 2020-02.

A Financial Professional affiliated with a Financial Institution may use another PTE. Please check with your Financial Institution to confirm which PTE you should be using.

1 The definition of an Advice Fiduciary is a fact specific analysis and may include Financial Professionals that make recommendations to retirement plan participants or individual retirement account (IRA) owners to roll their accounts from a plan to an IRA or annuity or from an existing IRA to a new IRA

 

PTE 84-24:

PTE 84-24 is available for use by Advice Fiduciaries who are not affiliated with a Financial Institution (or who are instructed to use PTE 84-24 by a Financial Institution). PTE 84-24 requires a written disclosure to be provided by the Financial Professional and signed by the client. There are four items involved in the disclosure:

  1. The relationship of the Financial Professional and the insurance carrier

  2. The commission to be received by the Financial Professional and, as a percentage of gross annual premium payments for the first year and for each of the following years

  3. A description of any charges, fees, discounts, penalties or adjustments which may be imposed under the recommended annuity contract

  4. Client acknowledgement, in writing, of the receipt of the information required by PTE 84-24 and approval of the transaction

 

Unlike other exemptions, such as PTE 2020-02, the use of PTE 84-24 does not require a Financial Professional to acknowledge ERISA fiduciary status.

State Adoption Grid

State

Effective Date

Alabama

1/1/2022
Alaska

11/23/2022

Arizona

1/1/2021

Arkansas

7/8/2021
California 1/1/2025
Colorado 11/1/2022

Connecticut

3/1/2022

Delaware

8/1/2021
Florida 1/1/2024
Georgia 8/1/2023
Hawaii 1/1/2023

Idaho

7/1/2021
Illinois 8/1/2023
Indiana 7/1/2024

Iowa

1/1/2021
Kansas 1/1/2024

Kentucky

1/4/2022

Maine

1/1/2022
Maryland 10/8/2022
Massachusetts 6/1/2023

Michigan

6/29/2021
Minnesota 1/1/2023

Mississippi

1/1/2022

Montana

10/1/2021

Nebraska

1/1/2022
New Hampshire 2/16/2024
New Mexico 10/1/2022
North Carolina 1/1/2023

North Dakota

1/1/2022

Ohio

8/14/2021
Oklahoma 9/1/2023
Oregon 1/1/2024
Pennsylvania 6/20/2022

Rhode Island

4/1/2021
South Carolina 1/1/2023
South Dakota 1/1/2023
Tennessee 1/1/2024

Texas

9/1/2021
Utah 7/1/2024
Vermont 7/5/2024

Virginia

9/1/2021
Washington 1/1/2024
West Virginia 6/8/2023
Wisconsin 10/1/2022
Wyoming 7/5/2023

Training

  • Financial professionals who engage in the sale of annuity products shall complete insurer product-specific training prior to the solicitation or recommendation of an annuity.
  • New annuity producers who have not met previous suitability general annuity training requirements, must complete a one-time four-hour best interest general annuity training course prior to being able to sell/solicit annuities.
  • Those who previously met the state’s NAIC suitability general annuity training requirements have the option to complete a one-hour update course in order to comply with the new NAIC best-interest model requirements. In general, completion of the optional one-hour update course must be done within six months of the state’s effective date of the amended regulation. Failure to meet the six-month requirement will require the completion of the four-hour best interest general annuity training course mentioned in the previous point.

 

To learn more about state requirements including required training dates, please visit these suggested training vendors or the vendor of your choice.

 

Sales Contests and Incentives

Insurers and financial professionals must identify and eliminate any sales contests, sales quotas, bonuses, and noncash compensation based on sales of specific annuities that could create a conflict of interest. The insurer is not required to make its compensation system incentive-neutral with those of other carriers that may have different system. (But differences between carriers are still subject to the rule that prohibits placing the producer’s or insurer’s interests ahead of the consumer’s.) Any sales contests sponsored by a financial professional involving Global Atlantic products must be submitted for review and approval.