Sales contest Probable losers under the DOL rule


Navigating the incentives to sell will be one of the most difficult aspects of complying with the Ministry of Labor investment advice rule.

This is one of the tricky aspects identified by a panel discussing “Prohibited Transaction Exemption 2020-02: Registered Broker Compliance Considerations” presented by LIMRA, LOMA and SRI on Wednesday.

Panelist Fred Reish, an ERISA expert at Drinker Biddle, said sales contests would be particularly difficult for brokers to maintain under the prohibited transaction exemption of DOL 2020-02.

“You can bet it will be closely scrutinized,” Reish said of the sales contests. “You really want to make sure you have all your ducks in a row in terms of compliance and oversight. … How do we manage this to ensure that the recommendations are in the best interest of the participant, as opposed to the investment professional doing something, compensation, in the sales competition? So they are risky.

Brokers and other distributors are working to understand how to work with PTE 2020-02 before the end of the execution grace period on December 20, although the exemption took effect on February 16.

The rule was to align with the best interests of Securities and Exchange Commission regulation. Distributors and experts have tried to figure out what they should be focusing on to ensure compliance.

“The incentive effect”

Although the DOL has published FAQs for PTE 2020-02, the department has occasionally deepened the mystery with some of its statements.

One of the differences that has become clear is that the DOL Rule in many ways is closer to ERISA’s prudent person rule than Reg BI, as with the DOL’s Best Interests Standard of Care, has said Reish. This is one of the reasons why distributors who follow the SEC rule should not assume that they are following the DOL rule by default.

In the case of sales contests, for example, distributors will have to demonstrate that they mitigate conflicts of interest, which is more important in the DOL rule.

“I’m worried about this because Reg BI doesn’t have a definition of mitigation,” Reish said. “But the DOL rule basically says that you have to mitigate the incentive effect, and in a way that makes you think they expect significant and serious mitigation of the incentive effect.”

Brokers may find themselves forced to limit compensation to a narrow range for products on their shelf, which likely means fewer products available to sellers. This would help to show that compensation is unlikely to play a role in choosing one variable annuity over another.

This becomes tricky when the consumer’s choice has affected whether the seller gets paid or not, or an “all or nothing” scenario.

“Some things require increased monitoring, for example, rollovers, because it’s an all-or-nothing scenario,” Reish said. “The money stays in the plan, you might not win anything. But if one rolls over to an IRA, then you will earn money on it. I would pay special attention to those types of all-or-nothing scenarios that require a really robust process, good supervision.

The balance could be difficult to find, he said. To be absolutely sure to exercise caution, a distributor could be so careful that he could interfere with business.

“I don’t think we’ll ever achieve a brilliant line comfort level where I am on this side of the line,” said Reish. “He’s going to look at the different factors: how compensation is managed, what kind of process you need for a certain recommendation, asset allocation, turnover.”

Judgment of a reasonable person

The rule of thumb remains a reasonable person’s judgment as to whether a distributor’s process is reasonably designed to mitigate conflicts of interest and to produce the best recommendation.

Reish acknowledged that following some of the rules by the letter can cause a bit of heartburn, Reish said of the written disclosures required.

“For example, a disclosure written by the broker and the investment professional is that they are trustees, which I imagine gives people a bit of indigestion,” Reish said, “because the One of the things that can be difficult to determine in a particular case is whether or not you are a trustee. But then initially you have to make a declaration in writing, it’s a trustee.

The webinar was the second of five that LIMRA, LOMA and SRI are presenting to clarify the DOL rule and exemptions, especially as the department publishes FAQs.

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has over 25 years of experience as a reporter and editor of newspapers and magazines. He was also vice president of communications for an association of insurance agents. Steve can be reached at [email protected]

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