InsuranceNewsNet outlined takeaways from a panel on “Prohibited Transaction Exemption 2020-02: Registered Broker-Dealer Compliance Considerations,” in which benefits and executive compensation partner Fred Reish discussed the Department of Labor’s (DOL) investment advice rule, including the incentive effect and required written disclosures.
In the article “Sales Contests Likely Losers Under DOL Rule,” Reish said that sales contests would be particularly difficult for broker-dealers to sustain under the DOL’s prohibited transaction exemption 2020-02.
“You can bet that it’ll be pretty closely scrutinized,” Reish said of sales contests. “You really want to make sure that you have all your ducks in a row in terms of compliance and supervision.” He added, “How can we manage this to make sure the recommendations are in the best interest of the participant, as opposed to the investment professional achieving something, compensation, within the context of the sales contest? So, they’re dicey.”
One of the differences that became clear is that, in many respects, the DOL rule is closer to ERISA’s prudent person rule than Reg BI, such as with the DOL’s best interest standard of care, Reish explained.
“I worry about that because Reg BI doesn’t have a definition of mitigation,” Reish said. “But the DOL rule basically says you have to dampen the incentive effect, and, in a way, that makes you think they’re expecting considerable, serious, dampening of the incentive effect.”
Additionally, Reish said, “Certain things cry out for heightened supervision — for example, rollovers — because that’s an all-or-nothing scenario.” If “the money stays in the plan, you might make nothing on it. But if it rolls to an IRA, then you will make money on it. I would pay particular attention to those all-or-nothing types of scenarios as requiring a really robust process and good supervision,” he continued.
However, the balance might be difficult to strike, Reish said. “I don’t think we’re ever going to get to a bright-line comfort level where I’m on this side of the line,” he noted. “It’s going to be looking at the various factors: how compensation is managed, what kind of process you require for a certain recommendation, asset allocation, rollover.”
Reish also acknowledged that following some of the rules by the letter can induce a bit of heartburn, he said of required written disclosures.
“For example, a written disclosure by the broker-dealer and the investment professional is that they are fiduciaries, which I imagine is giving folks quite a bit of indigestion,” Reish said. “One of the things that can be difficult to determine in a particular case is whether you’re a fiduciary or not. But then, up front, you’ve got to make a declaration in writing — they are a fiduciary.”