EBSA Final Rules

Amendment to and Partial Revocation of Prohibited Transaction Exemption (PTE) 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters   [4/8/2016]
[PDF]
Federal Register, Volume 81 Issue 68 (Friday, April 8, 2016)
[Federal Register Volume 81, Number 68 (Friday, April 8, 2016)]
[Rules and Regulations]
[Pages 21147-21181]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-07928]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

ZRIN 1210-ZA25
[Application Number D-11850]


Amendment to and Partial Revocation of Prohibited Transaction 
Exemption (PTE) 84-24 for Certain Transactions Involving Insurance 
Agents and Brokers, Pension Consultants, Insurance Companies, and 
Investment Company Principal Underwriters

AGENCY: Employee Benefits Security Administration (EBSA), Department of 
Labor.

ACTION: Adoption of amendment to and partial revocation of PTE 84-24.

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SUMMARY: This document amends and partially revokes Prohibited 
Transaction Exemption (PTE) 84-24, an exemption from certain prohibited 
transaction provisions of the Employee Retirement Income Security Act 
of 1974 (ERISA) and the Internal Revenue Code of 1986 (the Code). The 
ERISA and Code provisions at issue generally prohibit fiduciaries with 
respect to employee benefit plans and individual retirement accounts 
(IRAs) from engaging in self-dealing in connection with transactions 
involving these plans and IRAs. Non-fiduciary service providers also 
may not enter into certain transactions with plans and IRAs without an 
exemption. The amended exemption allows fiduciaries and other service 
providers to receive compensation when plans and IRAs purchase 
insurance contracts, ``Fixed Rate Annuity Contracts,'' as defined in 
the exemption, securities of investment companies registered under the 
Investment Company Act of 1940, as well as certain related 
transactions. The amendments increase the safeguards of the exemption. 
This document also contains the revocation of the exemption as it 
applies to plan and IRA purchases of annuity contracts that do not 
satisfy the definition of a Fixed Rate Annuity Contract, and the 
revocation of the exemption as it applies to IRA purchases of 
investment company securities. The amendments and revocations affect 
participants and beneficiaries of plans, IRA owners, and certain 
fiduciaries and service providers of plans and IRAs.

DATES: Issuance date: This amendment and partial revocation is issued 
June 7, 2016.
    Applicability date: This amendment and partial revocation is 
applicable to transactions occurring on or after April 10, 2017. For 
further information, see Applicability Date, below.

FOR FURTHER INFORMATION CONTACT: Brian Shiker or Brian Mica, Office of 
Exemption Determinations, Employee Benefits Security Administration, 
U.S. Department of Labor, 200 Constitution Avenue NW., Suite 400, 
Washington, DC 20210, (202) 693-8824 (not a toll-free number).

SUPPLEMENTARY INFORMATION: The Department is amending PTE 84-24 \1\ on 
its own motion, pursuant to ERISA section 408(a) and Code section 
4975(c)(2), and in accordance with the procedures set forth in 29 CFR 
part 2570, subpart B (76 FR 66637 (October 27, 2011)).
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    \1\ PTE 84-24, 49 FR 13208 (Apr. 3, 1984), as corrected, 49 FR 
24819 (June 15, 1984), as amended, 71 FR 5887 (Feb. 3, 2006).
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Executive Summary

Purpose of Regulatory Action

    The Department grants this amendment to PTE 84-24 in connection 
with its publication today, elsewhere in this issue of the Federal 
Register, of a final regulation defining who is a ``fiduciary'' of an 
employee benefit plan under ERISA as a result of giving investment 
advice to a plan or its participants or beneficiaries (Regulation). The 
Regulation also applies to the definition of a ``fiduciary'' of a plan 
(including an IRA) under the Code. The Regulation amends a prior 
regulation, dating to 1975, specifying when a person is a ``fiduciary'' 
under ERISA and the Code by reason of the provision of investment 
advice for a fee or other compensation regarding assets of a plan or 
IRA. The Regulation takes into account the advent of 401(k) plans and 
IRAs, the dramatic increase in rollovers, and other developments that 
have transformed the retirement plan landscape and the associated 
investment market over the four decades since the existing regulation 
was issued. In light of the extensive changes in retirement investment 
practices and relationships, the Regulation updates existing rules to 
distinguish more appropriately between the sorts of advice 
relationships that should be

[[Page 21148]]

treated as fiduciary in nature and those that should not.
    PTE 84-24 is an exemption originally granted in 1977, and amended 
several times over the years. It historically provided relief for 
certain parties to receive commissions when plans and IRAs purchased 
recommended insurance and annuity contracts and investment company 
securities (e.g., mutual fund shares). In connection with the adoption 
of the Regulation, PTE 84-24 is amended to increase the safeguards of 
the exemption and partially revoked in light of alternative exemptive 
relief finalized today. As amended, the exemption generally permits 
certain investment advice fiduciaries and other service providers to 
receive commissions in connection with the purchase of insurance 
contracts and Fixed Rate Annuity Contracts by plans and IRAs, as well 
as the purchase of investment company securities by plans. A Fixed Rate 
Annuity Contract is a fixed annuity contract issued by an insurance 
company that is either an immediate annuity contract or a deferred 
annuity contract that (i) satisfies applicable state standard 
nonforfeiture laws at the time of issue, or (ii) in the case of a group 
fixed annuity, guarantees return of principal net of reasonable 
compensation and provides a guaranteed declared minimum interest rate 
in accordance with the rates specified in the standard nonforfeiture 
laws in that state that are applicable to individual annuities; in 
either case, the benefits of which do not vary, in part or in whole, 
based on the investment experience of a separate account or accounts 
maintained by the insurer or the investment experience of an index or 
investment model. A Fixed Rate Annuity Contract does not include a 
variable annuity or an indexed annuity or similar annuity. Relief for 
compensation received in connection with purchases of annuity contracts 
that are not Fixed Rate Annuity Contracts by plans and IRAs, and 
compensation received in connection with purchases of investment 
company securities by IRAs, is revoked.
    This amendment to and partial revocation of PTE 84-24 is part of 
the Department's regulatory initiative to mitigate the effects of 
harmful conflicts of interest associated with fiduciary investment 
advice. In the absence of an exemption, ERISA and the Code generally 
prohibit fiduciaries from using their authority to affect or increase 
their own compensation. A new exemption for receipt of compensation by 
fiduciaries that provide investment advice to IRAs, plan participants 
and beneficiaries, and certain plan fiduciaries, is adopted elsewhere 
in this issue of the Federal Register, in the ``Best Interest Contract 
Exemption.'' That exemption provides relief for a broader range of 
transactions and compensation practices, including transactions 
involving annuity contracts that are not Fixed Rate Annuity Contracts, 
such as variable and indexed annuities. The Best Interest Contract 
Exemption contains important safeguards which address the conflicts of 
interest associated with investment recommendations in the more complex 
financial marketplace that has developed since PTE 84-24 was granted.
    ERISA section 408(a) specifically authorizes the Secretary of Labor 
to grant and amend administrative exemptions from ERISA's prohibited 
transaction provisions.\2\ Regulations at 29 CFR 2570.30 to 2570.52 
describe the procedures for applying for an administrative exemption. 
In amending this exemption, the Department has determined that the 
amended exemption is administratively feasible, in the interests of 
plans and their participants and beneficiaries and IRA owners, and 
protective of the rights of participants and beneficiaries of plans and 
IRA owners.
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    \2\ Code section 4975(c)(2) authorizes the Secretary of the 
Treasury to grant exemptions from the parallel prohibited 
transaction provisions of the Code. Reorganization Plan No. 4 of 
1978 (5 U.S.C. app. at 214 (2000)) (``Reorganization Plan'') 
generally transferred the authority of the Secretary of the Treasury 
to grant administrative exemptions under Code section 4975 to the 
Secretary of Labor. Specifically, section 102(a) of the 
Reorganization Plan provides the DOL with ``all authority'' for 
``regulations, rulings, opinions, and exemptions under section 4975 
[of the Code]'' subject to certain exceptions not relevant here. 
Reorganization Plan section 102. In President Carter's message to 
Congress regarding the Reorganization Plan, he made explicitly clear 
that as a result of the plan, ``Labor will have statutory authority 
for fiduciary obligations. . . . Labor will be responsible for 
overseeing fiduciary conduct under these provisions.'' 
Reorganization Plan, Message of the President. This amended 
exemption provides relief from the indicated prohibited transaction 
provisions of both ERISA and the Code.
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Summary of the Major Provisions

    PTE 84-24, as amended, provides an exemption for certain prohibited 
transactions that occur when investment advice fiduciaries and other 
service providers receive compensation for their recommendation that 
plans or IRAs purchase ``Fixed Rate Annuity Contracts'' as defined in 
the exemption, and insurance contracts. IRAs are defined in the 
exemption to include other plans described in Code section 
4975(e)(1)(B)-(F), such as Archer MSAs, Health Savings Accounts (HSAs), 
and Coverdell education savings accounts. Relief is also provided for 
certain prohibited transactions that occur when investment advice 
fiduciaries and other service providers receive compensation as a 
result of recommendations that plans purchase investment company 
securities. The exemption permits insurance agents, insurance brokers, 
pension consultants and investment company principal underwriters that 
are parties in interest or fiduciaries with respect to plans or IRAs, 
as applicable, to effect these purchases and receive a commission on 
them. The exemption is also available for the prohibited transaction 
that occurs when an insurance company selling a Fixed Rate Annuity 
Contract or insurance contract is a party in interest or disqualified 
person with respect to the plan or IRA.
    As amended, the exemption requires fiduciaries engaging in these 
transactions to adhere to certain ``Impartial Conduct Standards,'' 
including acting in the best interest of the plans and IRAs when 
providing advice. The amendment also more specifically defines the 
types of payments that are permitted under the exemption and revises 
the disclosure and recordkeeping requirements of the exemption.

Executive Order 12866 and 13563 Statement

    Under Executive Orders 12866 and 13563, the Department must 
determine whether a regulatory action is ``significant'' and therefore 
subject to the requirements of the Executive Orders and subject to 
review by the Office of Management and Budget (OMB). Executive Orders 
12866 and 13563 direct agencies to assess all costs and benefits of 
available regulatory alternatives and, if regulation is necessary, to 
select regulatory approaches that maximize net benefits (including 
potential economic, environmental, public health and safety effects, 
distributive impacts, and equity). Executive Order 13563 emphasizes the 
importance of quantifying both costs and benefits, of reducing costs, 
of harmonizing and streamlining rules, and of promoting flexibility. It 
also requires federal agencies to develop a plan under which the 
agencies will periodically review their existing significant 
regulations to make the agencies' regulatory programs more effective or 
less burdensome in achieving their regulatory objectives.
    Under Executive Order 12866, ``significant'' regulatory actions are 
subject to the requirements of the Executive Order and review by the 
Office of Management and Budget (OMB). Section 3(f) of Executive Order

[[Page 21149]]

12866, defines a ``significant regulatory action'' as an action that is 
likely to result in a rule (1) having an annual effect on the economy 
of $100 million or more, or adversely and materially affecting a sector 
of the economy, productivity, competition, jobs, the environment, 
public health or safety, or State, local or tribal governments or 
communities (also referred to as ``economically significant'' 
regulatory actions); (2) creating serious inconsistency or otherwise 
interfering with an action taken or planned by another agency; (3) 
materially altering the budgetary impacts of entitlement grants, user 
fees, or loan programs or the rights and obligations of recipients 
thereof; or (4) raising novel legal or policy issues arising out of 
legal mandates, the President's priorities, or the principles set forth 
in the Executive Order. Pursuant to the terms of the Executive Order, 
OMB has determined that this action is ``significant'' within the 
meaning of Section 3(f)(4) of the Executive Order. Accordingly, the 
Department has undertaken an assessment of the costs and benefits of 
the proposal, and OMB has reviewed this regulatory action. The 
Department's complete Regulatory Impact Analysis is available at 
www.dol.gov/ebsa.

Background

Regulation Defining a Fiduciary

    As explained more fully in the preamble to the Regulation, ERISA is 
a comprehensive statute designed to protect the interests of plan 
participants and beneficiaries, the integrity of employee benefit 
plans, and the security of retirement, health, and other critical 
benefits. The broad public interest in ERISA-covered plans is reflected 
in its imposition of fiduciary responsibilities on parties engaging in 
important plan activities, as well as in the tax-favored status of plan 
assets and investments. One of the chief ways in which ERISA protects 
employee benefit plans is by requiring that plan fiduciaries comply 
with fundamental obligations rooted in the law of trusts. In 
particular, plan fiduciaries must manage plan assets prudently and with 
undivided loyalty to the plans and their participants and 
beneficiaries.\3\ In addition, they must refrain from engaging in 
``prohibited transactions,'' which ERISA does not permit because of the 
dangers posed by the fiduciaries' conflicts of interest with respect to 
the transactions.\4\ When fiduciaries violate ERISA's fiduciary duties 
or the prohibited transaction rules, they may be held personally liable 
for the breach.\5\ In addition, violations of the prohibited 
transaction rules are subject to excise taxes under the Code.
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    \3\ ERISA section 404(a).
    \4\ ERISA section 406. ERISA also prohibits certain transactions 
between a plan and a ``party in interest.''
    \5\ ERISA section 409; see also ERISA section 405.
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    The Code also has rules regarding fiduciary conduct with respect to 
tax-favored accounts that are not generally covered by ERISA, such as 
IRAs. In particular, fiduciaries of these arrangements, including IRAs, 
are subject to the prohibited transaction rules, and, when they violate 
the rules, to the imposition of an excise tax enforced by the Internal 
Revenue Service (IRS). Unlike participants in plans covered by Title I 
of ERISA, IRA owners do not have a statutory right to bring suit 
against fiduciaries for violation of the prohibited transaction rules.
    Under this statutory framework, the determination of who is a 
``fiduciary'' is of central importance. Many of ERISA's and the Code's 
protections, duties, and liabilities hinge on fiduciary status. In 
relevant part, section 3(21)(A) of ERISA and section 4975(e)(3) of the 
Code provide that a person is a fiduciary with respect to a plan or IRA 
to the extent he or she (i) exercises any discretionary authority or 
discretionary control with respect to management of such plan or IRA, 
or exercises any authority or control with respect to management or 
disposition of its assets; (ii) renders investment advice for a fee or 
other compensation, direct or indirect, with respect to any moneys or 
other property of such plan or IRA, or has any authority or 
responsibility to do so; or (iii) has any discretionary authority or 
discretionary responsibility in the administration of such plan or IRA.
    The statutory definition deliberately casts a wide net in assigning 
fiduciary responsibility with respect to plan and IRA assets. Thus, 
``any authority or control'' over plan or IRA assets is sufficient to 
confer fiduciary status, and any persons who render ``investment advice 
for a fee or other compensation, direct or indirect'' are fiduciaries, 
regardless of whether they have direct control over the plan's or IRA's 
assets and regardless of their status as an investment adviser or 
broker under the federal securities laws. The statutory definition and 
associated responsibilities were enacted to ensure that plans, plan 
participants, and IRA owners can depend on persons who provide 
investment advice for a fee to provide recommendations that are 
untainted by conflicts of interest. In the absence of fiduciary status, 
persons who provide investment advice are neither subject to ERISA's 
fundamental fiduciary standards, nor accountable under ERISA or the 
Code for imprudent, disloyal, or biased advice.
    In 1975, the Department issued a regulation, at 29 CFR 2510.3-
21(c), defining the circumstances under which a person is treated as 
providing ``investment advice'' to an employee benefit plan within the 
meaning of section ERISA 3(21)(A)(ii) (the ``1975 regulation'').\6\ The 
1975 regulation narrowed the scope of the statutory definition of 
fiduciary investment advice by creating a five-part test for fiduciary 
advice. Under the 1975 regulation, for advice to constitute 
``investment advice,'' an adviser \7\ must--(1) render 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 (2) on a regular basis (3) pursuant to a mutual 
agreement, arrangement or understanding, with the plan or a plan 
fiduciary that (4) the advice will serve as a primary basis for 
investment decisions with respect to plan assets, and that (5) the 
advice will be individualized based on the particular needs of the 
plan. The regulation provided that an adviser is a fiduciary with 
respect to any particular instance of advice only if he or she meets 
each and every element of the five-part test with respect to the 
particular advice recipient or plan at issue.
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    \6\ The Department of the Treasury issued a virtually identical 
regulation, at 26 CFR 54.4975-9(c), which interprets Code section 
4975(e)(3).
    \7\ When using the term ``adviser,'' the Department does not 
intend to refer only to investment advisers registered under the 
Investment Advisers Act of 1940 or under state law, but rather to 
any person rendering fiduciary investment advice under the 
Regulation. For example, as used herein, the term adviser can be an 
individual who is, among other things, a representative of a 
registered investment adviser, a bank or similar financial 
institution, an insurance company, or a broker-dealer.
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    The market for retirement advice has changed dramatically since the 
Department first promulgated the 1975 regulation. Individuals, rather 
than large employers and professional money managers, have become 
increasingly responsible for managing retirement assets as IRAs and 
participant-directed plans, such as 401(k) plans, have supplanted 
defined benefit pensions. At the same time, the variety and complexity 
of financial products have increased, widening the information gap 
between advisers and their clients. Plan fiduciaries, plan participants 
and IRA investors must often rely on experts for advice, but are unable 
to assess the quality of the expert's advice or effectively guard 
against the adviser's

[[Page 21150]]

conflicts of interest. This challenge is especially true of retail 
investors who typically do not have financial expertise and can ill-
afford lower returns to their retirement savings caused by conflicts. 
The IRA accounts of these investors often account for all or the lion's 
share of their assets, and can represent all of savings earned for a 
lifetime of work. Losses and reduced returns can be devastating to the 
investors who depend upon such savings for support in their old age. As 
baby boomers retire, they are increasingly moving money from ERISA-
covered plans, where their employer has both the incentive and the 
fiduciary duty to facilitate sound investment choices, to IRAs where 
both good and bad investment choices are myriad and advice that is 
conflicted is commonplace. These rollovers are expected to approach 
$2.4 trillion cumulatively from 2016 through 2020.\8\ These trends were 
not apparent when the Department promulgated the 1975 rule. At that 
time, 401(k) plans did not yet exist and IRAs had only just been 
authorized.
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    \8\ Cerulli Associates, ``Retirement Markets 2015.''
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    As the marketplace for financial services has developed in the 
years since 1975, the five-part test has now come to undermine, rather 
than promote, the statutes' text and purposes. The narrowness of the 
1975 regulation has allowed advisers, brokers, consultants and 
valuation firms to play a central role in shaping plan and IRA 
investments, without ensuring the accountability that Congress intended 
for persons having such influence and responsibility. Even when plan 
sponsors, participants, beneficiaries, and IRA owners clearly relied on 
paid advisers for impartial guidance, the 1975 regulation has allowed 
many advisers to avoid fiduciary status and disregard basic fiduciary 
obligations of care and prohibitions on disloyal and conflicted 
transactions. As a consequence, these advisers have been able to steer 
customers to investments based on their own self-interest (e.g., 
products that generate higher fees for the adviser even if there are 
identical lower-fee products available), give imprudent advice, and 
engage in transactions that would otherwise be prohibited by ERISA and 
the Code without fear of accountability under either ERISA or the Code.
    In the Department's amendments to the regulation defining fiduciary 
advice within the meaning of ERISA section 3(21)(A)(ii) and Code 
section 4975(e)(3)(B) (the ``Regulation''), which are also published in 
this issue of the Federal Register, the Department is replacing the 
existing regulation with one that more appropriately distinguishes 
between the sorts of advice relationships that should be treated as 
fiduciary in nature and those that should not, in light of the legal 
framework and financial marketplace in which IRAs and plans currently 
operate.\9\
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    \9\ The Department initially proposed an amendment to its 
regulation defining a fiduciary within the meaning of ERISA section 
3(21)(A)(ii) and Code section 4975(e)(3)(B) on October 22, 2010, at 
75 FR 65263. It subsequently announced its intention to withdraw the 
proposal and propose a new rule, consistent with the President's 
Executive Orders 12866 and 13563, in order to give the public a full 
opportunity to evaluate and comment on the new proposal and updated 
economic analysis. The first proposed amendment to the rule was 
withdrawn on April 20, 2015, see 80 FR 21927.
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    The Regulation describes the types of advice that constitute 
``investment advice'' with respect to plan and IRA assets for purposes 
of the definition of a fiduciary at ERISA section 3(21)(A)(ii) and Code 
section 4975(e)(3)(B). The Regulation covers ERISA-covered plans, IRAs, 
and other plans not covered by Title I of ERISA, such as Keogh plans, 
and HSAs described in section 223(d) of the Code.
    As amended, the Regulation provides that a person renders 
investment advice with respect to assets of a plan or IRA if, among 
other things, the person provides, directly to a plan, a plan 
fiduciary, a plan participant or beneficiary, IRA or IRA owner, one of 
the following types of advice, for a fee or other compensation, whether 
direct or indirect:
    (i) A recommendation as to the advisability of acquiring, holding, 
disposing of, or exchanging, securities or other investment property, 
or a recommendation as to how securities or other investment property 
should be invested after the securities or other investment property 
are rolled over, transferred or distributed from the plan or IRA; and
    (ii) A recommendation as to the management of securities or other 
investment property, including, among other things, recommendations on 
investment policies or strategies, portfolio composition, selection of 
other persons to provide investment advice or investment management 
services, types of investment account arrangements (brokerage versus 
advisory), or recommendations with respect to rollovers, transfers or 
distributions from a plan or IRA, including whether, in what amount, in 
what form, and to what destination such a rollover, transfer or 
distribution should be made.
    In addition, in order to be treated as a fiduciary, such person, 
either directly or indirectly (e.g., through or together with any 
affiliate), must: Represent or acknowledge that it is acting as a 
fiduciary within the meaning of ERISA or the Code with respect to the 
advice described; represent or acknowledge that it is acting as a 
fiduciary within the meaning of the ERISA or the Code; render the 
advice pursuant to a written or verbal agreement, arrangement or 
understanding that the advice is based on the particular investment 
needs of the advice recipient; or direct the advice to a specific 
advice recipient or recipients regarding the advisability of a 
particular investment or management decision with respect to securities 
or other investment property of the plan or IRA. The Regulation also 
provides that as a threshold matter in order to be fiduciary advice, 
the communication must be a ``recommendation'' as defined therein. The 
Regulation, as a matter of clarification, provides that a variety of 
other communications do not constitute ``recommendations,'' including 
non-fiduciary investment education; general communications; and 
specified communications by platform providers. These communications 
which do not rise to the level of ``recommendations'' under the 
regulation are discussed more fully in the preamble to the final 
Regulation.
    The Regulation also specifies certain circumstances where the 
Department has determined that a person will not be treated as an 
investment advice fiduciary even though the person's activities 
technically may satisfy the definition of investment advice. For 
example, the Regulation contains a provision excluding recommendations 
to independent fiduciaries with financial expertise that are acting on 
behalf of plans or IRAs in arm's length transactions, if certain 
conditions are met. The independent fiduciary must be a bank, insurance 
carrier qualified to do business in more than one state, investment 
adviser registered under the Investment Advisers Act of 1940 or by a 
state, broker-dealer registered under the Securities Exchange Act of 
1934 (Exchange Act), or any other independent fiduciary that holds, or 
has under management or control, assets of at least $50 million, and: 
(1) The person making the recommendation must know or reasonably 
believe that the independent fiduciary of the plan or IRA is capable of 
evaluating investment risks independently, both in general and with 
regard to particular transactions and investment strategies (the person 
may rely on written representations from the plan or independent 
fiduciary to satisfy this condition); (2) the person

[[Page 21151]]

must fairly inform the independent fiduciary that the person is not 
undertaking to provide impartial investment advice, or to give advice 
in a fiduciary capacity, in connection with the transaction and must 
fairly inform the independent fiduciary of the existence and nature of 
the person's financial interests in the transaction; (3) the person 
must know or reasonably believe that the independent fiduciary of the 
plan or IRA is a fiduciary under ERISA or the Code, or both, with 
respect to the transaction and is responsible for exercising 
independent judgment in evaluating the transaction (the person may rely 
on written representations from the plan or independent fiduciary to 
satisfy this condition); and (4) the person cannot receive a fee or 
other compensation directly from the plan, plan fiduciary, plan 
participant or beneficiary, IRA, or IRA owner for the provision of 
investment advice (as opposed to other services) in connection with the 
transaction.
    Similarly, the Regulation provides that the provision of any advice 
to an employee benefit plan (as described in ERISA section 3(3)) by a 
person who is a swap dealer, security-based swap dealer, major swap 
participant, major security-based swap participant, or a swap clearing 
firm in connection with a swap or security-based swap, as defined in 
section 1a of the Commodity Exchange Act (7 U.S.C. 1a) and section 3(a) 
of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)) is not 
investment advice if certain conditions are met. Finally, the 
Regulation describes certain communications by employees of a plan 
sponsor, plan, or plan fiduciary that would not cause the employee to 
be an investment advice fiduciary if certain conditions are met.

Prohibited Transactions

    ERISA section 406(a)(1)(A)-(D) and Code section 4975(c)(1)(A)-(D) 
prohibit certain transactions between plans or IRAs and ``parties in 
interest,'' as defined in ERISA section 3(14), or ``disqualified 
persons,'' as defined in Code section 4975(e)(2). Fiduciaries and other 
service providers are parties in interest and disqualified persons 
under ERISA and the Code. As a result, they are prohibited from 
engaging in (1) the sale, exchange or leasing of property with a plan 
or IRA, (2) the lending of money or other extension of credit to a plan 
or IRA, (3) the furnishing of goods, services or facilities to a plan 
or IRA and (4) the transfer to or use by or for the benefit of a party 
in interest of plan assets.
    ERISA section 406(b) and Code section 4975(c)(1)(E) and (F) are 
aimed at fiduciaries only. These provisions generally prohibit a 
fiduciary from dealing with the income or assets of a plan or IRA in 
his or her own interest or his or her own account and from receiving 
payments from third parties in connection with transactions involving 
the plan or IRA. Parallel regulations issued by the Departments of 
Labor and the Treasury explain that these provisions impose on 
fiduciaries of plans and IRAs a duty not to act on conflicts of 
interest that may affect the fiduciary's best judgment on behalf of the 
plan or IRA. Under these provisions, a fiduciary may not cause a plan 
or IRA to pay an additional fee to such fiduciary, or to a person in 
which such fiduciary has an interest that may affect the exercise of 
the fiduciary's best judgment.
    The receipt of a commission on the sale of an insurance or annuity 
contract or investment company securities by a fiduciary that 
recommended the investment violates the prohibited transaction 
provisions of ERISA section 406(b) and Code section 4975(c)(1)(E) and 
(F). In addition, the effecting of the sale by a fiduciary or service 
provider is a service, potentially in violation of ERISA section 
406(a)(1)(C) and Code section 4975(c)(1)(C). Finally, the purchase of 
an insurance or annuity contract by a plan or IRA from an insurance 
company that is a fiduciary, service provider or other party in 
interest or disqualified person, violates ERISA section 406(a)(1)(A) 
and (D) and Code section 4975(c)(1)(A) and (D).

Prohibited Transaction Exemption 84-24

    As the prohibited transaction provisions demonstrate, ERISA and the 
Code strongly disfavor conflicts of interest. In appropriate cases, 
however, the statutes provide exemptions from their broad prohibitions 
on conflicts of interest. In addition, the Secretary of Labor has 
discretionary authority to grant administrative exemptions under ERISA 
and the Code on an individual or class basis, but only if the Secretary 
first finds that the exemptions are (1) administratively feasible, (2) 
in the interests of plans and their participants and beneficiaries and 
IRA owners, and (3) protective of the rights of the participants and 
beneficiaries of such plans and IRA owners. Accordingly, while 
fiduciary advisers may always give advice without need of an exemption 
if they avoid the sorts of conflicts of interest that result in 
prohibited transactions, when they choose to give advice in which they 
have a financial interest, they must rely upon an exemption.
    Pursuant to its exemption authority, the Department has previously 
granted several conditional administrative class exemptions that are 
available to fiduciary advisers in defined circumstances. PTE 84-24 
historically provided an exemption from the prohibited transaction 
provisions of ERISA and the Code for insurance agents, insurance 
brokers, pension consultants, insurance companies and investment 
company principal underwriters to engage in certain transactions 
involving insurance and annuity contracts, and investment company 
securities. Prior to this amendment, PTE 84-24 provided relief to these 
parties in connection with transactions involving ERISA-covered plans, 
Keogh plans, as well as IRAs and other plans described in Code section 
4975, such as Archer MSAs, HSAs and Coverdell education savings 
accounts.\10\
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    \10\ See PTE 2002-13, 67 FR 9483 (March 1, 2002) (preamble 
discussion of certain exemptions, including PTE 84-24, that apply to 
plans described in Code section 4975).
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    Specifically, PTE 84-24 permitted insurance agents, insurance 
brokers and pension consultants to receive, directly or indirectly, a 
commission for selling insurance or annuity contracts to plans and 
IRAs. The exemption also permitted the purchase by plans and IRAs of 
insurance and annuity contracts from insurance companies that are 
parties in interest or disqualified persons. The term ``insurance and 
annuity contract'' included a variable annuity contract.\11\
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    \11\ See PTE 77-9, 42 FR 32395 (June 24, 1977) (predecessor to 
PTE 84-24).
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    With respect to transactions involving investment company 
securities, PTE 84-24 also permitted the investment company's principal 
underwriter to receive commissions in connection with a plan's or IRA's 
purchase of investment company securities. The term ``principal 
underwriter'' is defined in the same manner as it is defined in the 
Investment Company Act of 1940. Section 2(a)(29) of the Investment 
Company Act of 1940 \12\ provides that a
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 80a-2(a)(29).

    `Principal underwriter' of or for any investment company other 
than a closed-end company, or of any security issued by such a 
company, means any underwriter who as principal purchases from such 
company, or pursuant to contract has the right (whether absolute or 
conditional) from time to time to purchase from such company, any 
such security for distribution, or who as agent for such company 
sells or has the right to sell any such security to a dealer or to 
the public or both, but does not include a dealer who purchases from 
such company through a principal underwriter acting as agent for 
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such company.


[[Page 21152]]


As the Department stated in a 1980 Advisory Opinion,\13\ the exemption 
is limited, in this regard, to principal underwriters acting in their 
ordinary course of business as principal underwriters, and does not 
extend more generally to all broker-dealers.\14\
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    \13\ Advisory Opinion 80-30A (May 21, 1980).
    \14\ PTE 84-24 also provides relief for: (1) The purchase, with 
plan assets, of an insurance or annuity contract from an insurance 
company which is a fiduciary or a service provider (or both) with 
respect to the plan solely by reason of the sponsorship of a master 
or prototype plan, and (2) the purchase, with plan assets, of 
investment company securities from, or the sale of such securities 
to, an investment company or investment company principal 
underwriter, when such investment company or its principal 
underwriter or investment adviser is a fiduciary or a service 
provider (or both) with respect to the plan solely by reason of: The 
sponsorship of a master or prototype plan or the provision of 
nondiscretionary trust services to the plan; or both.
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    In connection with the proposed Regulation, the Department proposed 
an amendment to PTE 84-24 that included several important changes. 
First, the Department proposed to increase the safeguards of the 
exemption by requiring fiduciaries that rely on the exemption to adhere 
to ``Impartial Conduct Standards,'' including acting in the best 
interest of the plans and IRAs when providing advice, and by more 
precisely defining the types of payments that are permitted under the 
exemption. Second, on a going forward basis, the Department proposed to 
revoke relief for insurance agents, insurance brokers and pension 
consultants to receive a commission in connection with the purchase by 
IRAs of variable annuity contracts and other annuity contracts that are 
securities under federal securities laws, and for investment company 
principal underwriters to receive a commission in connection with the 
purchase by IRAs of investment company securities.
    This amended exemption follows a lengthy public notice and comment 
process, which gave interested persons an extensive opportunity to 
comment on the proposed Regulation and the related exemption proposals, 
including the proposed amendment to and partial revocation of PTE 84-
24. The proposals initially provided for 75-day comment periods, ending 
on July 6, 2015, but the Department extended the comment periods to 
July 21, 2015. The Department then also held four days of public 
hearings on the new regulatory package, including the proposed 
exemptions, in Washington, DC from August 10 to 13, 2015, at which over 
75 speakers testified. The transcript of the hearing was made available 
on September 8, 2015, and the Department provided additional 
opportunity for interested persons to comment on the proposals or 
hearing transcript until September 24, 2015. A total of over 3,000 
comment letters were received on the new proposals. There were also 
over 300,000 submissions made as part of 30 separate petitions 
submitted on the proposals. These comments and petitions came from 
consumer groups, plan sponsors, financial services companies, 
academics, elected government officials, trade and industry 
associations, and others, both in support and in opposition to the rule 
and related exemption proposals.\15\ The Department has reviewed all 
comments, and after careful consideration of the comments, has decided 
to grant this amendment to and partial revocation of PTE 84-24, as 
described below.
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    \15\ As used throughout this preamble, the term ``comment'' 
refers to information provided through these various sources, 
including written comments, petitions and witnesses at the public 
hearing.
---------------------------------------------------------------------------

Description of the Amendment and Partial Revocation of PTE 84-24

    The final amendment to PTE 84-24 preserves the availability of the 
exemption for the receipt of commissions by insurance agents, insurance 
brokers and pension consultants, in connection with the recommendation 
that plans or IRAs purchase insurance contracts and certain types of 
annuity contracts defined in the exemption as ``Fixed Rate Annuity 
Contracts.'' A Fixed Rate Annuity Contract is a fixed annuity contract 
issued by an insurance company that is either an immediate annuity 
contract or a deferred annuity contract that (i) satisfies applicable 
state standard nonforfeiture laws at the time of issue, or (ii) in the 
case of a group fixed annuity, guarantees return of principal net of 
reasonable compensation and provides a guaranteed declared minimum 
interest rate in accordance with the rates specified in the standard 
nonforfeiture laws in that state that are applicable to individual 
annuities; in either case, the benefits of which do not vary, in part 
or in whole, based on the investment experience of a separate account 
or accounts maintained by the insurer or the investment experience of 
an index or investment model. A Fixed Rate Annuity Contract does not 
include a variable annuity, or an indexed annuity or similar annuity.
    The Department's approach to the definition of Fixed Rate Annuity 
Contract is generally based on satisfaction of applicable state 
standard nonforfeiture laws at the time of issue. If the applicable law 
does not have a standard nonforfeiture provision, the definition may be 
satisfied by compliance with the National Association of Insurance 
Commissioners (NAIC) Model Standard Nonforfeiture Law. However, for 
group fixed annuities, which the Department understands are not 
typically covered by standard nonforfeiture laws, the definition 
requires the annuity to meet comparable standards. Therefore, the group 
fixed annuity must guarantee return of principal net of reasonable 
compensation and provide a guaranteed declared minimum interest rate in 
accordance with the rates specified in the standard nonforfeiture laws 
in that state that are applicable to individual annuities (or the NAIC 
Model Standard Nonforfeiture Law if there is no applicable state 
standard nonforfeiture law).
    By defining a Fixed Rate Annuity Contract in this manner, the 
Department intends to cover within PTE 84-24 fixed annuities that 
currently are referred to as immediate annuities, traditional 
annuities, declared rate annuities or fixed rate annuities (including 
deferred income annuities). These annuities provide payments that are 
the subject of insurance companies' contractual guarantees and that are 
predictable. Permitting such annuities to be recommended under the 
terms of PTE 84-24 will promote access to these annuity contracts which 
have important lifetime income guarantees and terms that are more 
understandable to consumers. As noted by commenters, lifetime income 
products are increasingly critical for retirement savers due to the 
shift away from defined benefit plans. The Department notes that the 
fact that an annuity contract allows for the payment of dividends, 
allows the insurance company in its discretion to credit a rate higher 
than the minimum guarantee, or provides for a cost-of-living adjustment 
does not in and of itself remove an annuity contract from the 
definition of a Fixed Rate Annuity Contract under the exemption.
    On the other hand, the exemption does not cover variable annuities, 
indexed annuities or similar annuities, in which contract values vary, 
in whole or in part, based on the investment experience of a separate 
account or accounts maintained by the insurer or the investment 
experience of an index or investment model. In this regard, the 
exemption also does not cover any annuity registered as a security 
under federal securities laws. These investments typically require the 
customer to shoulder significant investment risk and do not offer the

[[Page 21153]]

same predictability of payments as Fixed Rate Annuity Contracts. The 
Department determined that these annuities, which are often quite 
complex and subject to significant conflicts of interest at the point 
of sale, should be sold under the more stringent conditions of the Best 
Interest Contract Exemption. The Best Interest Contract Exemption 
contains important safeguards which address the conflicts of interest 
associated with investment recommendations in the more complex 
financial marketplace that has developed since PTE 84-24 was granted. 
While it is the Department's general intent that new types of annuity 
products introduced after the finalization of this amendment should be 
sold under the conditions of the Best Interest Contract Exemption, the 
Department, as needed, will provide additional guidance or 
interpretations regarding whether a particular annuity contract, 
available now or in the future, satisfies the definition of Fixed Rate 
Annuity Contract for purposes of PTE 84-24.
    The amendment adopts the proposal's approach to the receipt of 
commissions by investment company principal underwriters. The exemption 
remains available for these transactions involving ERISA plans and 
Keogh plans, but not for IRAs and other plans described in Code section 
4975(e)(1)(B)-(D), including Archer MSAs, HSAs and Coverdell education 
savings accounts.
    As amended, the exemption requires fiduciaries engaging in these 
transactions to adhere to certain ``Impartial Conduct Standards,'' 
including acting in the best interest of the plans and IRAs when 
providing advice. The amendment also more specifically defines the 
types of payments that are permitted under the exemption and revises 
the disclosure and recordkeeping requirements of the exemption.
    The Department amended and revoked PTE 84-24 in these ways only in 
conjunction with the grant of a new exemption, the Best Interest 
Contract Exemption, adopted elsewhere in this issue of the Federal 
Register, that is applicable to advice to certain ``retirement 
investors''--generally retail investors such as plan participants and 
beneficiaries, IRA owners, and certain plan fiduciaries. The Best 
Interest Contract Exemption provides broad relief for investment advice 
fiduciaries to recommend all investments, subject to protective 
conditions, including that the recommendation be in the best interest 
of the retirement investor. The exemption applies to all annuities, 
including Fixed Rate Annuity Contracts as well as variable annuity 
contracts and indexed annuity contracts. Likewise, broader relief is 
available in the Best Interest Contract Exemption for transactions 
involving investment company securities involving both plans and IRAs 
that are retirement investors. As discussed in more detail below, the 
conditions of the Best Interest Contract Exemption more appropriately 
address these conflicted arrangements.
    In addition, the Regulation adopted today permits investment 
professionals--including insurance agents, insurance brokers, pension 
consultants, and mutual fund principal underwriters--to avoid fiduciary 
status when they engage in arm's length transactions with plans or IRAs 
that are independently represented by a fiduciary with financial 
expertise. Such independent fiduciaries generally include banks, 
insurance carriers, registered investment advisers, broker-dealers and 
other fiduciaries with $50 million or more in assets under management 
or control. This provision in the Regulation complements the 
limitations in the Best Interest Contract Exemption and is available 
for transactions involving all insurance and annuity contracts and 
investment company securities.\16\
---------------------------------------------------------------------------

    \16\ Parties satisfying this provision of the Regulation are not 
fiduciaries subject to the provisions of ERISA section 406(b) and 
Code section 4975(c)(1)(E) and (F) but they may still be subject to 
the prohibited transactions restrictions of ERISA section 406(a) and 
Code section 4975(c)(1)(A)-(D) for transactions involving parties in 
interest and disqualified persons. To the extent relief from those 
provisions is necessary for non-fiduciaries entering into insurance 
and annuity contract transactions, the Best Interest Contract 
Exemption provides such relief in a supplemental exemption in 
Section VI of the exemption, even for parties that are not 
retirement investors.
---------------------------------------------------------------------------

    A number of commenters objected generally to changes to PTE 84-24 
on the basis that the original exemption, in combination with other 
regulatory safeguards under insurance law or securities law, provides 
sufficient protections to plans and IRAs. Commenters said there is no 
demonstrated harm to these consumers under the existing approach.
    The Department does not agree. The extensive changes in the 
retirement plan landscape and the associated investment market in 
recent decades undermine the continued adequacy of the original 
approach in PTE 84-24. In the years since the exemption was originally 
granted in 1977,\17\ the growth of 401(k) plans and IRAs has 
increasingly placed responsibility for critical investment decisions on 
individual investors rather than professional plan asset managers. 
Moreover, at the same time as individual investors have increasingly 
become responsible for managing their own investments, the complexity 
of investment products and range of conflicted compensation structures 
have likewise increased. As a result, it is appropriate to revisit and 
revise the exemption to better reflect the realities of the current 
marketplace.
---------------------------------------------------------------------------

    \17\ See PTE 77-9, 42 FR 32395 (June 24, 1977) (predecessor to 
PTE 84-24).
---------------------------------------------------------------------------

    Therefore, while the exemption remains available for insurance 
contracts and Fixed Rate Annuity Contracts, it is revoked for annuity 
contracts that do not satisfy the definition of Fixed Rate Annuity 
contracts. Accordingly, the exemption specifically excludes 
recommendations of variable annuities, indexed annuities and similar 
annuities. Given the complexity, investment risks, and conflicted sales 
practices associated with these products, the Department has determined 
that recommendations to purchase such annuities should be subject to 
the greater protections of the Best Interest Contract Exemption.
    Both the Securities and Exchange Commission (SEC) staff and the 
Financial Industry Regulatory Authority (FINRA) \18\ have issued 
publications specifically addressing variable annuities and indexed 
annuities. In its Investor Alert ``Variable Annuities: Beyond the Hard 
Sell,'' which focused on deferred variable annuities, FINRA stated:
---------------------------------------------------------------------------

    \18\ FINRA is registered with the Securities and Exchange 
Commission (SEC) as a national securities association and is a self-
regulatory organization, as those terms are defined in the Exchange 
Act, which operates under SEC oversight.

    The marketing efforts used by some variable annuity sellers 
deserve scrutiny--especially when seniors are the targeted 
investors. Sales pitches for these products might attempt to scare 
or confuse investors. One scare tactic used with seniors is to claim 
that a variable annuity will protect them from lawsuits or seizures 
of their assets. Many such claims are not based on facts, but 
nevertheless help land a sale. While variable annuities can be 
appropriate as an investment under the right circumstances, as an 
investor, you should be aware of their restrictive features, 
understand that substantial taxes and charges may apply if you 
withdraw your money early, and guard against fear-inducing sales 
---------------------------------------------------------------------------
tactics.

The FINRA alert further stated:

    Investing in a variable annuity within a tax-deferred account, 
such as an individual retirement account (IRA) may not be a good 
idea. Since IRAs are already tax-advantaged, a variable annuity will 
provide no additional tax savings. It will, however, increase the

[[Page 21154]]

expense of the IRA, while generating fees and commissions for the 
broker or salesperson.\19\
---------------------------------------------------------------------------

    \19\ ``Variable Annuities: Beyond the Hard Sell,'' available at 
http://www.finra.org/sites/default/files/InvestorDocument/p125846.pdf. FINRA also has special suitability rules for certain 
investment products, including variable annuities. See FINRA Rule 
2330 (imposing heightened suitability, disclosure, supervision and 
training obligations regarding variable annuities); see also FINRA 
rule 2360 (options) and FINRA rule 2370 (securities futures). See 
also SEC Office of Investor Education and Advocacy Investor 
Publication ``Variable Annuities: What You Should Know'' available 
at http://www.sec.gov/investor/pubs/varannty.htm. ``[I]f you are 
investing in a variable annuity through a tax-advantaged retirement 
plan (such as a 401(k) plan or IRA), you will get no additional tax 
advantage from the variable annuity. Under these circumstances, 
consider buying a variable annuity only if it makes sense because of 
the annuity's other features, such as lifetime income payments and 
death benefit protection. The tax rules that apply to variable 
annuities can be complicated--before investing, you may want to 
consult a tax adviser about the tax consequences to you of investing 
in a variable annuity.''

With respect to indexed annuities, a FINRA Investor Alert, ``Equity-
---------------------------------------------------------------------------
Indexed Annuities: A Complex Choice,'' stated:

    Sales of equity-indexed annuities (EIAs) . . . have grown 
considerably in recent years. Although one insurance company at one 
time included the word `simple' in the name of its product, EIAs are 
anything but easy to understand. One of the most confusing features 
of an EIA is the method used to calculate the gain in the index to 
which the annuity is linked. To make matters worse, there is not 
one, but several different indexing methods. Because of the variety 
and complexity of the methods used to credit interest, investors 
will find it difficult to compare one EIA to another.'' \20\
---------------------------------------------------------------------------

    \20\ ``Equity-Indexed Annuities: A Complex Choice'' available at 
https://www.finra.org/investors/alerts/equity-indexed-annuities_a-complex-choice.

Similarly, in its 2011 ``Investor Bulletin: Indexed Annuities,'' the 
---------------------------------------------------------------------------
SEC staff stated:

    You can lose money buying an indexed annuity. If you need to 
cancel your annuity early, you may have to pay a significant 
surrender charge and tax penalties. A surrender charge may result in 
a loss of principal, so that an investor may receive less than his 
original purchase payments. Thus, even with a specified minimum 
value from the insurance company, it can take several years for an 
investment in an indexed annuity to `break even.' \21\
---------------------------------------------------------------------------

    \21\ SEC Office of Investor Education and Advocacy Investor 
Bulletin: Indexed Annuities, available at https://www.sec.gov/investor/alerts/secindexedannuities.pdf.

---------------------------------------------------------------------------
The SEC staff further noted:

    It is important to note that indexed annuity contracts commonly 
allow the insurance company to change the participation rate, cap, 
and/or margin/spread/asset or administrative fee on a periodic--such 
as annual--basis. Such changes could adversely affect your 
return.\22\
---------------------------------------------------------------------------

    \22\ Id.

Finally, a commenter noted that the North American Securities 
Administrators Association has issued the following statement on equity 
---------------------------------------------------------------------------
indexed annuities:

    Equity indexed annuities are extremely complex investment 
products that have often been used as instruments of fraud and 
abuse. For years, they have taken an especially heavy toll on our 
nation's most vulnerable investors, our senior citizens for whom 
they are clearly unsuitable.\23\
---------------------------------------------------------------------------

    \23\ See NASAA Statement on SEC Equity-Indexed Annuity Rule 
(December 17, 2008) available at http://www.nasaa.org/5611/statement-on-sec-equity-indexed-annuity-rule/.

    In the Department's view, the increasing complexity and conflicted 
payment structures associated with these annuity products have 
heightened the conflicts of interest experienced by investment advice 
providers that recommend them. These are complex products requiring 
careful consideration of their terms and risks. Assessing the prudence 
of a particular indexed annuity requires an understanding of surrender 
terms and charges; interest rate caps; the particular market index or 
indexes to which the annuity is linked; the scope of any downside risk; 
associated administrative and other charges; the insurer's authority to 
revise terms and charges over the life of the investment; and the 
specific methodology used to compute the index-linked interest rate and 
any optional benefits that may be offered, such as living benefits and 
death benefits. In operation, the index-linked interest rate can be 
affected by participation rates; spread, margin or asset fees; interest 
rate caps; the particular method for determining the change in the 
relevant index over the annuity's period (annual, high water mark, or 
point-to-point); and the method for calculating interest earned during 
the annuity's term (e.g., simple or compounded interest). Investors can 
all too easily overestimate the value of these contracts, misunderstand 
the linkage between the contract and index performance, underestimate 
the costs of the contract, and overestimate the scope of their 
protection from downside risk (or wrongly believe they have no risk of 
loss). As a result, retirement investors are acutely dependent on sound 
advice that is untainted by the conflicts of interest posed by 
advisers' incentives to secure the annuity purchase, which can be quite 
substantial.
    These developments have undermined the protections of PTE 84-24 as 
applied to variable and indexed annuities purchased by plans and IRAs. 
As stated in the accompanying Regulatory Impact Analysis, conflicts of 
interest in the marketplace for retail investments result in billions 
of dollars of underperformance to investors saving for retirement. Both 
categories of annuities, variable and indexed annuities, are 
susceptible to abuse, and all retirement investors--plans and IRAs 
alike--would benefit from a requirement that advisers adhere to 
enforceable standards of fiduciary conduct and fair dealing. The 
Department has therefore concluded that variable annuities, indexed 
annuities and similar annuities are properly recommended to both plans 
and IRAs under the conditions of the Best Interest Contract Exemption.
    The Best Interest Contract Exemption's important protections 
include fiduciary advisers' enforceable contractual commitment to 
adhere to the Impartial Conduct Standards, such as giving best interest 
advice; financial institutions' express written acknowledgment of their 
fiduciary status; and full disclosure of conflicts of interest, 
compensation practices, and financial arrangements with third parties. 
As part of the Best Interest Contract Exemption's protections, 
financial institutions must also adopt and adhere to stringent anti-
conflict policies and procedures aimed at ensuring advice that is in 
the best interest of the retirement investor and avoiding misaligned 
financial incentives. These protective conditions serve as strong 
counterweights to the conflicts of interest associated with complex 
investment products, such as variable and indexed annuities.
    However, the Department is not fully revoking PTE 84-24. In this 
final amendment, the scope of the exemption as applicable to insurance 
transactions has been narrowed to focus on ``Fixed Rate Annuity 
Contracts,'' which are defined as fixed annuity contracts issued by an 
insurance company that are either immediate annuity contracts or 
deferred annuity contracts that (i) satisfy applicable state standard 
nonforfeiture laws at the time of issue, or (ii) in the case of a group 
fixed annuity, guarantee return of principal net of reasonable 
compensation and provide a guaranteed declared minimum interest rate in 
accordance with the rates specified in the standard nonforfeiture laws 
in that state that are applicable to individual annuities; in either 
case, the benefits of which do not vary, in part or in whole, based on 
the investment experience of a separate account or accounts maintained 
by the insurer or the investment experience of an index or investment 
model. A Fixed Rate Annuity Contract does not include

[[Page 21155]]

a variable annuity or an indexed annuity or similar annuity. 
Accordingly, PTE 84-24 effectively provides a more streamlined 
exemption for less complex annuity products that provide guaranteed 
lifetime income.
    Additionally, the Department revokes the exemption for covered 
mutual fund transactions involving IRAs (as defined in the exemption). 
The amended exemption incorporates the Impartial Conduct Standards, and 
applies to narrow categories of payments. The Department finds that the 
conditions of the amended exemption are appropriate in connection with 
the narrow scope of relief provided in the amended exemption.
    The specific changes to PTE 84-24, and comments received on the 
proposed amendment and revocation, are discussed below.

Scope of the Amended Exemption

    Section I(b) of the exemption, as amended, provides relief for six 
transactions if the conditions of the exemption are satisfied. The 
exemption provides relief from the application of ERISA section 
406(a)(1)(A) though (D) and 406(b) and the taxes imposed by Code 
section 4975(a) and (b) by reason of Code section 4975(c)(1)(A) through 
(F). The six transactions are:

    (1) The receipt, directly or indirectly, by an insurance agent 
or broker or a pension consultant of an Insurance Commission and 
related employee benefits, from an insurance company in connection 
with the purchase, with assets of a Plan or Individual Retirement 
Account (IRA),\24\ including through a rollover or distribution, of 
an insurance contract or Fixed Rate Annuity Contract. A Fixed Rate 
Annuity Contract is a fixed annuity contract issued by an insurance 
company that is either an immediate annuity contract or a deferred 
annuity contract that (i) satisfies applicable state standard 
nonforfeiture laws at the time of issue, or (ii) in the case of a 
group fixed annuity, guarantees return of principal net of 
reasonable compensation and provides a guaranteed declared minimum 
interest rate in accordance with the rates specified in the standard 
nonforfeiture laws in that state that are applicable to individual 
annuities; in either case, the benefits of which do not vary, in 
part or in whole, based on the investment experience of a separate 
account or accounts maintained by the insurer or the investment 
experience of an index or investment model. A Fixed Rate Annuity 
Contract does not include a variable annuity or an indexed annuity 
or similar annuity.
---------------------------------------------------------------------------

    \24\ For purposes of this amendment, the terms ``Individual 
Retirement Account'' or ``IRA'' mean any account or annuity 
described in Code section 4975(e)(1)(B) through (F), including, for 
example, an individual retirement account described in section 
408(a) of the Code and an HSA described in section 223(d) of the 
Code.
---------------------------------------------------------------------------

    (2) The receipt of a Mutual Fund Commission by a Principal 
Underwriter for an investment company registered under the 
Investment Company Act of 1940 (an investment company) in connection 
with the purchase, with Plan assets, including through a rollover or 
distribution, of securities issued by an investment company.
    (3)(i) The effecting by an insurance agent or broker, or pension 
consultant of a transaction for the purchase, with assets of a Plan 
or IRA, including through a rollover or distribution, of a Fixed 
Rate Annuity Contract or insurance contract, or (ii) the effecting 
by a Principal Underwriter of a transaction for the purchase, with 
assets of a Plan, including through a rollover or distribution, of 
securities issued by an investment company.
    (4) The purchase, with assets of a Plan or IRA, including 
through a rollover or distribution, of a Fixed Rate Annuity Contract 
or insurance contract from an insurance company, and the receipt of 
compensation or other consideration by the insurance company.
    (5) The purchase, with assets of a Plan, of a Fixed Rate Annuity 
Contract or insurance contract from an insurance company which is a 
fiduciary or a service provider (or both) with respect to the Plan 
solely by reason of the sponsorship of a Master or Prototype Plan.
    (6) The purchase, with assets of a Plan, of securities issued by 
an investment company from, or the sale of such securities to, an 
investment company or an investment company Principal Underwriter, 
when the investment company, Principal Underwriter, or the 
investment company investment adviser is a fiduciary or a service 
provider (or both) with respect to the Plan solely by reason of: (A) 
The sponsorship of a Master or Prototype Plan; or (B) the provision 
of Nondiscretionary Trust Services to the Plan; or (C) both (A) and 
(B).

    The amended exemption is, therefore, limited to plan and IRA 
transactions involving Fixed Rate Annuity Contracts and insurance 
contracts. The exemption's transactions regarding investment company 
securities are limited to transactions involving plans. Transactions 
involving advice with respect to annuities that do not meet the 
definition of Fixed Rate Annuity Contract (i.e., variable annuities, 
indexed annuities, and similar annuities) and investment company 
transactions involving IRAs must occur under the conditions of another 
exemption, such as the Best Interest Contract Exemption, to the extent 
the transactions are otherwise prohibited. Section I(c) makes these 
issues of scope clear.\25\
---------------------------------------------------------------------------

    \25\ The Department notes that the provisions of the exemption 
for ``insurance contracts'' refer to an insurance contract that is 
not an annuity; accordingly, it is not possible to rely on the 
exemption for a variable annuity contract transaction, for example, 
under the theory that a variable annuity contract falls within the 
provisions for insurance contracts as opposed to annuity contracts.
---------------------------------------------------------------------------

    The Department also made certain additional revisions to the 
description of the covered transactions, as a result of commenters' 
input. Although the Department intended that the exemption, as amended, 
cover transactions resulting from a rollover or distribution, some 
commenters expressed concern about the exemption's applicability in 
that context, and the text now specifically states that the exemption 
applies in the context of a rollover or distribution. In addition, in 
Section I(b)(1), the final exemption explicitly provides that, in 
addition to Insurance Commissions, the payment of related employee 
benefits is covered under the exemption. This revision was made in 
response to comments, discussed in greater detail below, regarding 
certain types of payments commonly paid to insurance company statutory 
employees that commenters believed may raise prohibited transactions 
issues.\26\ Finally, in Section I(a)(4), the Department expressly 
revised the scope of covered transactions regarding Fixed Rate Annuity 
Contracts and insurance contracts to specify that the relief under the 
exemption extends to the receipt of compensation or other consideration 
by the insurance company involved in the transaction, in addition to 
the commission received by the insurance agent, insurance broker, or 
pension consultant.\27\
---------------------------------------------------------------------------

    \26\ Some commenters asked whether the exemption covered salary, 
bonuses, overtime pay, and employee benefits provided to common law 
employees. Based on the information provided in the comments, the 
Department was unable to determine why the commenters believed 
salary, overtime pay and benefits provided to common law employees 
constitute prohibited transactions for which relief is necessary. 
With respect to bonus payments that raise prohibited transaction 
issues, without additional information, the Department is unable to 
evaluate how the conditions of this amended exemption would apply to 
such payments. The Department will provide additional guidance if 
commenters wish to provide additional information and analysis 
related to any of these payments to common law employees. 
Additionally, to the extent the conditions are met, the Department 
notes that the Best Interest Contract Exemption is not limited to 
any particular form of compensation and therefore would provide 
relief for such payments.
    \27\ Regarding the scope of the exemption, one commenter 
requested that the Department clarify whether the Department's 
Advisory Opinion 2000-15 allows fiduciaries providing investment 
advice for a fee to utilize PTE 84-24. The advisory opinion 
concerned the application of PTE 84-24 to transactions involving 
IRAs offered by TIAA-CREF. The opinion did not disallow investment 
advice fiduciaries from using PTE 84-24, but rather expressed the 
Department's longstanding view that the types of payments available 
under PTE 84-24 are limited to commissions, as opposed to other 
types of fees for investment advice. Thus the opinion stated, ``[i]t 
is the Department's view that PTE 84-24 would not provide relief for 
any prohibited transaction that may arise in connection with the 
receipt of any fees or other compensation separate and apart from 
the commission paid to a principal underwriter upon a plan's 
purchase of recommended securities. Thus, PTE 84-24 does not exempt 
any prohibited transaction arising out of transactions involving 
fees paid to a fiduciary service provider with respect to an advice 
program which provides specific/individualized asset allocation 
recommendations to participants based on their responses to 
questionnaires.''

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[[Page 21156]]

    Comments on these issues of scope are discussed below. Although the 
majority of commenters on the proposed revocation focused on the 
amendment's application to insurance and annuity contracts, some also 
addressed the proposed revocation of relief for investment company 
transactions.
a. Insurance and Annuity Products
    In the proposed amendment, the Department proposed to revoke relief 
for transactions involving IRAs and variable annuities and other 
annuity contracts that are securities under federal securities laws. As 
an initial matter, some commenters raised a concern about terminology, 
noting that all annuity products are securities, but some are 
``exempt'' securities under section 3(a) of the Securities Act of 1933. 
For purposes of this preamble discussion, the Department has adopted 
that the ``exempt'' terminology.
    The proposed amendment to PTE 84-24 stated that the proposed Best 
Interest Contract Exemption was designed for IRA owners and other 
investors that rely on fiduciary investment advisers in the retail 
marketplace, and expressed the view that some of the transactions 
involving IRAs that were permitted under PTE 84-24 should instead occur 
under the conditions of the Best Interest Contract Exemption, 
specifically, transactions involving variable annuity contracts and 
other annuity contracts that are non-exempt securities under federal 
securities laws, and investment company securities.
    The proposed amendment further proposed that transactions involving 
insurance and annuity contracts that are exempt securities could 
continue to occur under PTE 84-24, with the added protections of the 
Impartial Conduct Standards. In taking this approach, the proposal 
noted that that the Department was not certain that the conditions of 
the proposed Best Interest Contract Exemption, including some of the 
disclosure requirements, would be readily applicable to insurance and 
annuity contracts that are exempt securities, or that the distribution 
methods and channels of such insurance products would fit within the 
exemption's framework.
    The proposal, therefore, distinguished between transactions that 
involve insurance products that are exempt securities and those that 
are non-exempt securities. This distinction was based on the view that 
annuity contracts that are non-exempt securities and investment company 
securities are distributed through the same channels as many other 
investments covered by the Best Interest Contract Exemption, and such 
investment products have similar disclosure requirements under existing 
regulations. Accordingly, the conditions of the proposed Best Interest 
Contract Exemption were viewed as appropriately tailored for such 
transactions.
    The Department considered the contractual enforcement mechanism 
proposed in the Best Interest Contract Exemption as especially relevant 
to IRA owners, who do not have a mechanism to enforce the prohibited 
transactions provisions of ERISA and the Code. However, other 
conditions of the proposed Best Interest Contract Exemption were 
equally protective of both plans and IRAs, including the requirement 
that financial institutions relying on the exemption adopt anti-
conflict policies and procedures designed to ensure that advisers 
satisfy the Impartial Conduct Standards.
    The Department sought comment on the distinction drawn in the 
proposed amendment to PTE 84-24 between exempt and non-exempt 
securities. In particular, the proposal asked whether revoking relief 
for non-exempt securities transactions involving IRAs but leaving in 
place relief for IRA transactions involving insurance products that are 
exempt securities struck the appropriate balance, and whether that 
approach would be sufficiently protective of the interests of the IRAs. 
The Department also sought comment in the proposed Best Interest 
Contract Exemption on a number of issues related to the workability of 
that exemption (particularly, the disclosure requirements) for exempt 
insurance and annuity products. A number of comments on the two 
proposals addressed this issue of scope.
    Some commenters, expressing concern about the risks associated with 
variable annuities, commended the Department for proposing that 
variable annuities should be recommended under the conditions of the 
Best Interest Contract Exemption rather than PTE 84-24. Generally, the 
commenters argued that due to the complexity, illiquidity and 
commission and fee structure of variable annuities and similar 
products, investors should be provided the additional protections of 
the Best Interest Contract Exemption for transactions involving these 
investments.
    In this regard, commenters argued that variable annuities and 
investment company securities are similar to the other assets listed in 
the definition of assets in the proposed Best Interest Contract 
Exemption in that their value may fluctuate on a daily basis and, as 
such, variable annuities and investment company securities should be 
treated consistently with other investments in securities. The comments 
stated that the Best Interest Contract Exemption would offer protection 
and a means of redress for investors due to the conflicts of interest 
created by the commission and fee structure of variable annuities.
    In addition to comments on variable annuities, some commenters 
argued that due to their complexity, fee structure, inherent conflicts 
of interest, as well as lack of regulation under the securities laws, 
indexed annuities similarly require heightened regulation. Consistent 
with this position, commenters argued that indexed annuities should be 
treated the same as variable annuities under the Department's 
exemptions. Additionally, one commenter noted that the compensation 
structure for indexed annuities is similar to that of variable 
annuities, raising comparable concerns regarding conflicts of interest. 
As a result, commenters said that recommendations of such products by 
fiduciaries should be subject to the same protective conditions as 
those proposed for variable annuities under the Best Interest Contract 
Exemption.
    The Department understands that like Fixed Rate Annuity Contracts, 
indexed annuities are generally not regulated as registered securities 
under federal securities laws. Although the SEC issued a rule in 2008 
that would have treated certain indexed annuities as securities, the 
rule was vacated by court order \28\ and the SEC subsequently withdrew 
the rule.\29\ As several commenters noted, the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the Dodd-Frank Act), Title IX, 
section 989J calls for certain annuity contracts to be considered 
exempt securities by the SEC if the conditions of that section are met. 
In addition, the SEC Web site's Investor Information section states 
``An indexed annuity may or may not be a security;

[[Page 21157]]

however, most indexed annuities are not registered with the SEC.'' \30\
---------------------------------------------------------------------------

    \28\ Am. Equity Life Ins. Co. v. SEC, 613 F.3d 166, 179 (D.C. 
Cir. 2010).
    \29\ 75 FR 64642 (Oct. 20, 2010).
    \30\ https://www.sec.gov/answers/annuity.htm.
---------------------------------------------------------------------------

    Despite the fact that the proposed amendment to PTE 84-24 focused 
on the distinction between exempt and non-exempt securities under 
federal securities law, some commenters asserted that indexed annuities 
should also be covered under the Best Interest Contract Exemption in 
order to enhance retirement investor protection in an area lacking 
sufficient protections for investors in tax qualified accounts. A 
commenter argued that IRA owners need greater protections when 
investing in indexed annuities precisely because such products are not 
regulated as securities and therefore do not fall within FINRA's 
jurisdiction.
    A few commenters cited statements by the SEC staff, FINRA and the 
North American Securities Administrators Association, regarding indexed 
annuities. The statements, quoted at length above, touch upon the 
risks, complexity and sales tactics associated with these products. In 
particular, the SEC staff pointed to the possibility of significant 
surrender charges, and the fact that the insurance company may be 
permitted to change the terms of the annuity on an annual basis, 
adversely affecting the return. As noted, the FINRA Investor Alert, 
``Equity-Indexed Annuities: A Complex Choice,'' states that equity-
indexed annuities ``are anything but easy to understand.'' \31\ One 
commenter asserted that many advisers, in addition to their clients, do 
not fully understand indexed annuities.
---------------------------------------------------------------------------

    \31\ ``Equity-Indexed Annuities: A Complex Choice'' available at 
https://www.finra.org/investors/alerts/equity-indexed-annuities_a-complex-choice.
---------------------------------------------------------------------------

    In this regard, a commenter further argued that there is no 
difference between the conflicted compensation arrangements of variable 
annuity contracts and indexed annuity contracts and asserted that 
typically compensation paid to advisers for sales of indexed annuities 
is higher than other products, creating an incentive to sell indexed 
annuities. The commenter noted that requiring indexed annuity 
transactions to occur under the Best Interest Contract Exemption would 
result in firms developing policies and procedures that would protect 
retirement investors from compensation practices that encourage 
recommendations not in the investor's best interest. The commenter 
argued that the lack of regulation of indexed annuities under the 
securities laws supports the argument for applying expanded safeguards 
under the Best Interest Contract Exemption for recommendations 
involving these products.
    The industry generally opposed the approach taken in the proposal 
to revoke the relief historically provided by PTE 84-24 for variable 
annuities and other annuities that are non-exempt securities under 
federal securities laws. They wrote that the insurance industry should 
be able to rely on PTE 84-24 for all insurance products, rather than 
bifurcating relief between two exemptions. A number of commenters 
asserted that variable annuity contracts were more closely aligned with 
insurance products than with securities, and that variable annuities 
were not just a ``package'' of mutual funds. Commenters argued that, 
like fixed annuities, variable annuities provide retirement income 
guarantees and insurance guarantees that distinguish the annuities from 
other investments that lack such guarantee, and therefore fixed and 
variable annuities should be treated the same under the Department's 
exemptions. One commenter stated that federal securities laws recognize 
that variable annuities are different from mutual funds and the laws 
accommodate these differences. These commenters disputed the suggestion 
that the distinction between annuities that are exempt securities and 
non-exempt securities merited different treatment in the exemptions.
    In this regard, some industry commenters focused on indexed 
annuities, in particular. These commenters asserted that fixed indexed 
annuities and fixed annuities are identical insurance products except 
for the method of calculating interest credited to the contract. They 
said that indexed annuities are treated the same as other fixed 
annuities under state insurance law and federal securities law, and 
stated that indexed annuities can offer the same income, insurance and 
contractual guarantees as fixed annuities. Moreover, some commenters 
noted that significant investment risk is borne by the insurer and 
there is no risk of principal loss, assuming that the investor does not 
incur surrender charges.\32\ According to some commenters, indexed 
annuities are no more complex than other fixed annuities, and there are 
no different conflicts of interest created with their sales, as 
compared to fixed annuities.
---------------------------------------------------------------------------

    \32\ However, as the SEC staff noted in its 2011 ``Investor 
Bulletin: Indexed Annuities'': ``You can lose money buying an 
indexed annuity. If you need to cancel your annuity early, you may 
have to pay a significant surrender charge and tax penalties. A 
surrender charge may result in a loss of principal, so that an 
investor may receive less than his original purchase payments. Thus, 
even with a specified minimum value from the insurance company, it 
can take several years for an investment in an indexed annuity to 
`break even.' ''
---------------------------------------------------------------------------

    Commenters also emphasized the benefit, for compliance purposes, of 
having one exemption for all insurance products, including variable 
annuities and indexed annuities. These commenters highlighted the 
importance of lifetime income options, and the ways the Department, the 
Treasury Department and the IRS have worked to make annuities more 
accessible to retirement investors. Many of these commenters took the 
position that the Department's proposed approach would undermine these 
efforts by hindering access to lifetime income products by plans and 
IRAs.
    Commenters said that some aspects of the proposed Best Interest 
Contract Exemption would exacerbate this problem. In particular, they 
expressed uncertainty as to the extent to which the Best Interest 
Contract Exemption permitted commission-based compensation for 
fiduciary advisers. By comparison, it was maintained, PTE 84-24 clearly 
referenced the receipt of a commission. There were also concerns about 
the disclosure requirements and certain other requirements as 
applicable to the insurance industry. Commenters said the burden of 
complying with the Best Interest Contract Exemption would cause some in 
the insurance industry to leave the market. Many commenters took the 
position that existing regulation of these products is sufficient.
    After consideration of all of the comments, the Department has made 
revisions to both PTE 84-24 and the final Best Interest Contract 
Exemption as applicable to annuity contracts. Under this final 
amendment to PTE 84-24, the scope of covered annuity transactions is 
limited to plan and IRA transactions involving Fixed Rate Annuity 
Contracts. Accordingly, PTE 84-24 now provides a streamlined exemption 
for relatively straightforward guaranteed lifetime income products such 
as immediate and deferred income annuities, while leaving coverage of 
variable annuity contracts, indexed annuity contracts, and similar 
annuity contracts, to the Best Interest Contract Exemption. Based upon 
its significant concerns about the complexity, risk, and conflicts of 
interest associated with recommendations of variable annuity contracts, 
indexed annuity contracts and similar contracts, the final exemption 
treats these transactions the

[[Page 21158]]

same way whether the investor is a plan or IRA.\33\
---------------------------------------------------------------------------

    \33\ One commenter suggested the Department create a streamlined 
exemption for a class of fixed annuity that pays a contractually 
guaranteed rate of interest, has a surrender charge period of no 
more than seven years and restricts the commission structure to 
trail payments only. The Department considered this approach when 
amending the scope of PTE 84-24, but the suggested approach did not 
address all the Department's concerns with the conflicts of interest 
associated with annuities. In particular, as discussed herein, the 
Department determined that indexed annuities--which could fit within 
the parameters established by the commenter--have characteristics 
that warrant the particular protections of the Best Interest 
Contract Exemption.
---------------------------------------------------------------------------

    At the same time, the Department revised the Best Interest Contract 
Exemption in ways that accommodate fiduciary recommendations for both 
plans and IRAs to purchase variable annuities and indexed annuities. 
The final Best Interest Contract Exemption contains more streamlined 
disclosure conditions that are applicable to a wide variety of 
products. The pre-transaction disclosure does not require a projection 
of the total cost of the recommended investment, which commenters 
indicated would be difficult to provide in the insurance context. The 
final exemption does not include the proposed data collection 
requirement, which also posed problems for insurance products, 
according to commenters. Further, the language of the final exemption 
was adjusted to address industry concerns in other places and the 
preamble provides interpretations to address the particular questions 
and concerns raised by the insurance industry. For example, the 
preamble of the Best Interest Contract Exemption makes clear that 
commissions are permitted under the exemption and that annuity 
commissions do not necessarily violate the Impartial Conduct Standards. 
In addition, the ``reasonable compensation'' standard adopted in the 
final exemption addresses comments from the insurance industry. Section 
IV of that exemption additionally provides specific guidance on the 
satisfaction of the Best Interest standard by proprietary product 
providers. Commenters stressed a desire for one exemption covering all 
insurance and annuity products; the final Best Interest Contract 
Exemption does just that, while ensuring a greater level of protection 
to vulnerable retirement investors.
    In light of the ways in which these products have developed, and 
the concerns articulated by other regulators and the commenters 
regarding the complexity, risks, and enhanced conflicts of interest 
associated with them, the Department determined that the conditions of 
PTE 84-24 are insufficiently protective to safeguard the interests of 
plans and IRAs investing in these products. The Best Interest Contract 
Exemption's conditions, such as a contractual commitment to adhere to 
the Impartial Conduct Standards when transacting with IRA owners, the 
required adoption of and adherence to anti-conflict policies and 
procedures, and the required disclosures of conflicts of interest, are 
necessary to address dangerous conflicts present in transactions 
involving these products. Moreover, this final amendment and partial 
revocation of PTE 84-24 creates a uniform approach for plans and IRAs 
under which indexed annuities and variable annuities can be recommended 
only under the same protective conditions as other investments covered 
in the Best Interest Contract Exemption and avoids creating a 
regulatory incentive to preferentially recommend indexed annuities. As 
a final issue of scope, one commenter stated the Department should add 
an exclusion to the Regulation that would apply to the recommendation 
of a Qualified Longevity Annuity Contract as described in Treasury 
Regulation sections 1.401(a)(9) and 1.408, provided the disclosure 
requirements found in Treasury Regulation section 1.408-6 are satisfied 
and any disclosure requirements under applicable state insurance law 
are met. As an alternative, the commenter recommended that the 
Department should exclude recommendations on Qualified Longevity 
Annuity Contracts from PTE 84-24's Impartial Conduct Standards and the 
recordkeeping requirements.
    The Department considered this request but declined to single out 
Qualified Longevity Annuity Contracts for unique treatment under PTE 
84-24. Regardless of the merit of any particular investment in such an 
annuity, the Department is mindful that the exemption permits 
investment advice fiduciaries to make recommendations and receive 
compensation pursuant to conflicted arrangements. The conditions of PTE 
84-24, as amended, are streamlined to promote access to such lifetime 
income products, but the Impartial Conduct Standards and recordkeeping 
requirements are critical conditions aimed at ensuring that all 
retirement investors receive basic fiduciary protections, regardless of 
the particular product the adviser chooses to recommend. The mere fact 
that a recommended investment is a Qualified Longevity Annuity Contract 
does not guarantee that the recommendation is prudent, unbiased, or in 
the customer's best interest. An important goal of this regulatory 
project is to ensure that all retirement investors receive advice that 
adheres to these basic standards of prudence, loyalty, honesty, and 
reasonable compensation.
    For the reader's convenience, the chart attached as Appendix I 
describes some of the basic features and attributes of the different 
categories of annuities discussed above.
b. Investment Company Transactions
    The proposed amendment and partial revocation also applied to 
investment company transactions historically covered under the 
exemption. Under the proposed amendment, receipt of compensation by 
investment company principal underwriters in connection with IRA 
transactions involving investment company securities would no longer be 
permitted under PTE 84-24.\34\ These transactions are, however, covered 
under the Best Interest Contract Exemption as applicable to 
``retirement investors.''
---------------------------------------------------------------------------

    \34\ For purposes of this amendment, the terms ``Individual 
Retirement Account'' or ``IRA'' mean any account or annuity 
described in Code section 4975(e)(1)(B) through (F), including, for 
example, an individual retirement account described in section 
408(a) of the Code and an HSA described in section 223(d) of the 
Code.
---------------------------------------------------------------------------

    A few commenters addressed this aspect of the proposal. The 
commenters indicated the exemption had long been used by broker-dealers 
for mutual fund transactions and questioned the basis for the 
revocation of such relief. In this regard, relief under the exemption 
was historically limited by the Department to investment company 
principal underwriters ``in the ordinary course of [their] business'' 
as principal underwriters.\35\ The Department never intended for the 
exemption to provide relief for broker-dealers that are not principal 
underwriters. The Best Interest Contract Exemption is specifically 
designed to address recommendations by such broker-dealers and contains 
appropriate safeguards for these transactions involving IRAs, as 
discussed in detail in the preamble to the Best Interest Contract 
Exemption.
---------------------------------------------------------------------------

    \35\ See Advisory Opinion 80-30A. As noted above, the term 
``principal underwriter'' is defined in the same manner as it is 
defined in section 2(a)(29) of the Investment Company Act of 1940 
(15 U.S.C. 80a-2(a)(29)).
---------------------------------------------------------------------------

    One commenter requested that the Department extend relief under the 
exemption to include Mutual Fund Commissions paid to principal 
underwriters and their agents. The Department has not revised the 
exemption in this respect because the

[[Page 21159]]

exemption already permits the principal underwriter to share the 
commissions with its agents and employees.\36\ Accordingly, no 
amendment was necessary.
---------------------------------------------------------------------------

    \36\ See Letter to John A. Cardon, et al., (October 31, 1977) 
(discussing payment of a portion of the commission to an employee of 
the principal underwriter).
---------------------------------------------------------------------------

    One commenter suggested that ``sophisticated'' IRA owners should 
not be subject to the exemption's amendments, but instead should be 
able to use the exemption under the same conditions applicable to 
plans. The commenter suggested the Department could rely on the federal 
securities laws, specifically the accredited investor rules, which the 
commenter said are commonly used and understood and identify investors 
who may be financially sophisticated. In response, the Department notes 
that, as amended, the exemption's conditions do apply equally to plans 
and IRAs in the context of Fixed Rate Annuity Contracts. With respect 
to investment company transactions, the Department declines to provide 
a special rule based on the accredited investor rules or similar 
criteria. As explained above, the Regulation describes circumstances 
under which a person will not be a fiduciary when he or she engages in 
a transaction with an independent plan or IRA fiduciary with financial 
expertise. This approach in the Regulation does not extend to 
individual IRA owners or plan participants and beneficiaries. 
Individuals with large account balances may have reached that point 
through years of hard work, careful savings, the rollover of an account 
balance from a defined benefit plan, or from an inheritance. None of 
these paths necessarily correlate with financial expertise or 
sophistication, or suggest a reduced need for stringent fiduciary 
protections. Although relief is no longer available under this 
exemption for investment company securities transactions with IRA 
owners, individual plan participants or beneficiaries, the Best 
Interest Contract Exemption is available for such transactions. The 
Best Interest Contract Exemption was designed for IRA owners and other 
investors that rely on fiduciary investment advisers in the retail 
marketplace.
    One commenter indicated that the exemptions uniformly failed to 
provide relief for non-proprietary mutual fund transactions sold to 
plans on an agency basis. The Department does not agree with this 
comment. The existing exemption, PTE 86-128 \37\ (also amended today), 
permits non-proprietary mutual fund sales to plans on an agency basis. 
Further, the Best Interest Contract Exemption explicitly covers such 
advice with respect to retail investors, and the Regulation defining 
fiduciary advice creates a carve-out from fiduciary coverage for arm's 
length transactions between sophisticated counterparties engaged in 
such transactions. To the extent that commenters asked to expand the 
scope of PTE 84-24 to other investments, the Department responds that 
the Best Interest Contract Exemption and its specifically tailored and 
protective conditions is available for such expanded relief. To the 
extent firms do not wish to comply with the conditions in that 
exemption, they may provide advice under circumstances that are free 
from the sorts of conflicts of interest that trigger the prohibited 
transaction rules.
---------------------------------------------------------------------------

    \37\ Exemption for Securities Transactions Involving Employee 
Benefit Plans and Broker-Dealers, 51 FR 41686 (November 18, 1986), 
as amended, 67 FR 64137 (October 17, 2002).
---------------------------------------------------------------------------

Impartial Conduct Standards

    A new Section II of the exemption requires that insurance agents, 
insurance brokers, pension consultants, insurance companies and 
investment company principal underwriters that are fiduciaries engaging 
in the exempted transactions comply with fundamental Impartial Conduct 
Standards.
    Generally stated, the Impartial Conduct Standards require that when 
insurance agents, insurance brokers, pension consultants, insurance 
companies or investment company principal underwriters provide 
fiduciary investment advice, they act in the plan's or IRA's Best 
Interest, and not make misleading statements to the plan or IRA about 
recommended transactions. As defined in the exemption, the insurance 
agent or broker, pension consultant, insurance company or investment 
company principal underwriter act in the Best Interest of a plan or IRA 
when they act ``with care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent person acting in a like 
capacity and familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims, based on the 
investment objectives, risk tolerance, financial circumstances and 
needs of the Plan or IRA, without regard to the financial or other 
interests of the fiduciary, any affiliate or other party.''
    It is important to note that, unlike some of the other exemptions 
finalized today in this issue of the Federal Register, there is no 
requirement under this exemption that parties contractually commit to 
the Impartial Conduct Standards. Also unlike some of the other 
exemptions finalized or amended today, the Impartial Conduct Standards 
in PTE 84-24 do not include a requirement that the compensation 
received by the fiduciary and affiliates be reasonable. Such a 
requirement already exists under Section III(c) of the exemption, and 
is therefore unnecessary in Section II. As discussed below, Section 
III(c) aligns the conditions of this exemption with the standards 
finalized in the other exemptions including the Best Interest Contract 
Exemption.\38\
---------------------------------------------------------------------------

    \38\ There is also no requirement in the other exemptions 
finalized today to contractually warrant compliance with applicable 
federal and state laws, as was proposed. However, significant 
violations of applicable federal or state law could also amount to 
violations of the Impartial Conduct Standards, such as the Best 
Interest standard, in which case, this exemption, as amended, would 
be unavailable for transactions occurring in connection with such 
violations.
---------------------------------------------------------------------------

    The Impartial Conduct Standards represent fundamental obligations 
of fair dealing and fiduciary conduct. The concepts of prudence and 
undivided loyalty are deeply rooted in ERISA and the common law of 
agency and trusts.\39\ These longstanding concepts of law and equity 
were developed in significant part to deal with the issues that arise 
when agents and persons in a position of trust have conflicting 
loyalties, and accordingly, are well-suited to the problems posed by 
conflicted investment advice. The requirement that the adviser act 
``without regard to'' the adviser's own financial interests or the 
interests of persons other than the retirement investor is a concise 
expression of ERISA's duty of loyalty as expressed in section 
404(a)(1)(A) of ERISA and applied in the context of advice. It is 
consistent with the formulation stated in common law, and it is 
consistent with the language used by Congress in Section 913(g)(1) of 
the Dodd-Frank Act,\40\ and cited in the Staff of the U.S. Securities 
and Exchange Commission ``Study on Investment Advisers and Broker-
Dealers, as required under the Dodd-Frank Act'' (Jan. 2011) (SEC staff 
Dodd-Frank

[[Page 21160]]

Study).\41\ The Department notes, however, that the standard is not 
intended to outlaw investment advice fiduciaries' provision of advice 
from investment menus that are restricted on the basis of proprietary 
products or revenue sharing. Finally, the ``reasonable compensation'' 
obligation is a feature of ERISA and the Code under current law that 
has long applied to financial services providers, whether fiduciaries 
or not.
---------------------------------------------------------------------------

    \39\ See generally ERISA sections 404(a), 408(b)(2); Restatement 
(Third) of Trusts section 78 (2007), and Restatement (Third) of 
Agency section 8.01.
    \40\ Section 913(g) governs ``Standard of Conduct'' and 
subsection (1) provides that ``The Commission may promulgate rules 
to provide that the standard of conduct for all brokers, dealers, 
and investment advisers, when providing personalized investment 
advice about securities to retail customers (and such other 
customers as the Commission may by rule provide), shall be to act in 
the best interest of the customer without regard to the financial or 
other interest of the broker, dealer, or investment adviser 
providing the advice.''
    \41\ SEC Staff Study on Investment Advisers and Broker-Dealers, 
January 2011, available at https://www.sec.gov/news/studies/2011/913studyfinal.pdf, pp.109-110.
---------------------------------------------------------------------------

    The Department received many comments on the proposed Impartial 
Conduct Standards. A number of commenters focused on the Department's 
authority to impose the Impartial Conduct Standards as conditions of 
this exemption. Commenters' arguments regarding the Impartial Conduct 
Standards as applicable to IRAs and non-ERISA plans were based 
generally on the fact that the standards, as noted above, are 
consistent with longstanding principles of prudence and loyalty set 
forth in ERISA section 404, but which have no counterpart in the Code. 
Commenters took the position that because Congress did not choose to 
impose the standards of prudence and loyalty on fiduciaries with 
respect to IRAs and non-ERISA plans, the Department exceeded its 
authority in proposing similar standards as a condition of relief in a 
prohibited transaction exemption.
    With respect to ERISA plans, commenters stated that Congress' 
separation of the duties of prudence and loyalty (in ERISA section 404) 
from the prohibited transaction provisions (in ERISA section 406), 
showed an intent that the two should remain separate. Commenters 
additionally questioned why the conduct standards were necessary for 
ERISA plans, when such plans already have an enforceable right to 
fiduciary conduct that is both prudent and loyal. Commenters asserted 
that imposing the Impartial Conduct Standards as conditions of the 
exemption created strict liability for prudence violations.
    Some commenters additionally took the position that Congress, in 
the Dodd-Frank Act, gave the SEC the authority to establish standards 
for broker-dealers and investment advisers and therefore, the 
Department did not have the authority to act in that area. The 
Department disagrees that the exemption exceeds its authority. The 
Department has clear authority under ERISA section 408(a) and the 
Reorganization Plan \42\ to grant administrative exemptions from the 
prohibited transaction provisions of both ERISA and the Code. Congress 
gave the Department broad discretion to grant or deny exemptions and to 
craft conditions for those exemptions, subject only to the overarching 
requirement that the exemption be administratively feasible, in the 
interests of plans, plan participants and beneficiaries and IRA owners, 
and protective of their rights.\43\ Nothing in ERISA or the Code 
suggests that, in exercising its express discretion to fashion 
appropriate conditions, the Department is forbidden to borrow from 
time-honored trust-law standards and principles developed by the courts 
to ensure proper fiduciary conduct.
---------------------------------------------------------------------------

    \42\ See fn. 2, supra, discussing of Reorganization Plan No. 4 
of 1978 (5 U.S.C. app. at 214 (2000)).
    \43\ See ERISA section 408(a) and Code section 4975(c)(2).
---------------------------------------------------------------------------

    The Impartial Conduct Standards represent, in the Department's 
view, baseline standards of fundamental fair dealing that must be 
present when fiduciaries make conflicted investment recommendations to 
retirement investors. After careful consideration, the Department 
determined that relief should be provided to investment advice 
fiduciaries receiving conflicted compensation only if such fiduciaries 
provided advice in accordance with the Impartial Conduct Standards--
i.e., if they provided prudent advice without regard to the interests 
of such fiduciaries and their affiliates and related entities, in 
exchange for reasonable compensation and without misleading investors.
    These Impartial Conduct Standards are necessary to ensure that 
advisers' recommendations reflect the best interest of their retirement 
investor customers, rather than the conflicting financial interests of 
the advisers and their financial institutions. As a result, advisers 
and financial institutions bear the burden of showing compliance with 
the exemption and face liability for engaging in a non-exempt 
prohibited transaction if they fail to provide advice that is prudent 
or otherwise in violation of the standards. The Department does not 
view this as a flaw in the exemption, as commenters suggested, but 
rather as a significant deterrent to violations of important conditions 
under an exemption that accommodates a wide variety of potentially 
dangerous compensation practices. The Department similarly disagrees 
that Congress' directive to the SEC in the Dodd-Frank Act limits its 
authority to establish appropriate and protective conditions in the 
context of a prohibited transaction exemption. Section 913 of that Act 
directs the SEC to conduct a study on the standards of care applicable 
to brokers-dealers and investment advisers, and issue a report 
containing, among other things:

an analysis of whether [sic] any identified legal or regulatory 
gaps, shortcomings, or overlap in legal or regulatory standards in 
the protection of retail customers relating to the standards of care 
for brokers, dealers, investment advisers, persons associated with 
brokers or dealers, and persons associated with investment advisers 
for providing personalized investment advice about securities to 
retail customers.\44\
---------------------------------------------------------------------------

    \44\ Dodd-Frank Act, sec. 913(d)(2)(B).

    Section 913 authorizes, but does not require, the SEC to issue 
rules addressing standards of care for broker-dealers and investment 
advisers for providing personalized investment advice about securities 
to retail customers.\45\ Nothing in the Dodd-Frank Act indicates that 
Congress meant to preclude the Department's regulation of fiduciary 
investment advice under ERISA or its application of such a regulation 
to securities brokers or dealers. To the contrary, Dodd-Frank in 
directing the SEC study specifically directed the SEC to consider the 
effectiveness of existing legal and regulatory standard of care under 
other federal and state authorities. Dodd-Frank Act, sec. 913(b)(1) and 
(c)(1). The Dodd-Frank Act did not take away the Department's 
responsibility with respect to the definition of fiduciary under ERISA 
and in the Code; nor did it qualify the Department's authority to issue 
exemptions that are administratively feasible, in the interests of 
plans, participants and beneficiaries, and IRA owners, and protective 
of the rights of participants and beneficiaries of the plans and IRA 
owners.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 80b-11(g)(1).
---------------------------------------------------------------------------

    Some commenters suggested that it would be unnecessary to impose 
the Impartial Conduct Standards on advisers with respect to ERISA plans 
because fiduciaries to these Plans already are required to adhere to 
these obligations under the provisions of the statute. The Department 
considered this comment but has determined not to eliminate the conduct 
standards as conditions of the exemption for ERISA plans. One of the 
Department's goals is to ensure equal footing for all retirement 
investors. The SEC staff Dodd-Frank Study found that investors were 
frequently confused by the differing standards of care applicable to 
broker-dealers and registered investment advisers. The Department hopes 
to

[[Page 21161]]

minimize such confusion in the market for retirement advice by holding 
investment advice fiduciaries to similar standards, regardless of 
whether they are giving the advice to an ERISA plan, IRA, or a non-
ERISA plan.
    Moreover, inclusion of the standards in the exemption's conditions 
adds an important additional safeguard for ERISA and IRA investors 
alike because the party engaging in a prohibited transaction has the 
burden of showing compliance with an applicable exemption, when 
violations are alleged.\46\ In the Department's view, this burden-
shifting is appropriate because of the dangers posed by conflicts of 
interest, as reflected in the Department's Regulatory Impact Analysis 
and because of the difficulties plans and IRA investors have in 
effectively policing such violations.\47\
---------------------------------------------------------------------------

    \46\ See e.g., Fish v. GreatBanc Trust Company, 749 F.3d 671 
(7th Cir. 2014).
    \47\ As a practical matter, one way for financial institutions 
to ensure that they can meet this burden is by implementing strong 
anti-conflict policies and procedures, and by refraining from 
creating incentives to violate the Impartial Conduct Standards. 
Although this exemption does not require that financial institutions 
make any warranty to their customers about the adoption of such 
policies and procedures, the Department expects that financial 
institutions that take the Impartial Conduct Standards seriously 
will adopt such practices.
---------------------------------------------------------------------------

    A few commenters also expressed concern that the requirements of 
this exemption, as proposed, would interfere with state insurance 
regulatory programs. In particular, one commenter asserted that the 
Impartial Conduct Standards could usurp state insurance regulations. 
The Department does not agree with these comments. In addition to 
consulting with state insurance regulators and the NAIC as part of this 
project, the Department has also reviewed NAIC model laws and 
regulations and state reactions to those models in order to ensure the 
requirements of this exemption work cohesively with the requirements 
currently in place. The Department has crafted the exemption so that it 
will work with, and complement, state insurance regulations. In 
addition, the Department confirms that it is not its intent to preempt 
or supersede state insurance law and enforcement, and that state 
insurance laws remain subject to the ERISA section 514(b)(2)(A) savings 
clause.
    Several commenters also raised questions about the role of the 
McCarran-Ferguson Act \48\ and the Department's authority to regulate 
insurance products. The McCarran-Ferguson Act states that federal laws 
do not preempt state laws to the extent they relate to or are enacted 
for the purpose of regulating the business of insurance; it does not, 
however, prohibit federal regulation of insurance.\49\ The Department 
has designed the exemption to work with and complement state insurance 
laws, not to invalidate, impair, or preempt state insurance laws.\50\ 
Specifically, the Supreme Court has made it clear that ``the McCarran-
Ferguson Act does not surrender regulation exclusively to the States so 
as to preclude the applicable of ERISA to an insurer's actions.'' \51\
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 1011 et seq. (1945).
    \49\ See John Hancock Mut. Life Ins. Co. v. Harris Trust & Sav. 
Bank, 510 U.S. 86, 97-101 (1993) (holding that ``ERISA leaves room 
for complementary or dual federal or state regulation, and calls for 
federal supremacy when the two regimes cannot be harmonized or 
accommodated'').
    \50\ See BancOklahoma Mortg. Corp. v. Capital Title Co., Inc., 
194 F.3d 1089 (10th Cir. 1999) (stating that McCarran-Ferguson Act 
bars the application of a federal statute only if (1) the federal 
statute does not specifically relate to the business of insurance; 
(2) a state statute has been enacted for the purpose of regulating 
the business of insurance; and (3) the federal statute would 
invalidate, impair, or supersede the state statute); Prescott 
Architects, Inc. v. Lexington Ins. Co., 638 F. Supp. 2d 1317 (N.D. 
Fla. 2009); see also U.S. v. Rhode Island Insurers' Insolvency Fund, 
80 F.3d 616 (1st Cir. 1996).
    \51\ John Hancock, 510 U.S. at 98.
---------------------------------------------------------------------------

    Other commenters generally asserted that some of the exemption's 
terms were too vague and would result in the exemption failing to meet 
the ``administratively feasible'' requirement under ERISA section 
408(a) and Code section 4975(c)(2). The Department disagrees with these 
commenters' suggestion that ERISA section 408(a) and Code section 
4975(c)(2) fail to be satisfied by the exemption's principles-based 
approach or that the exemption's standards are unduly vague. It is 
worth repeating that the Impartial Conduct Standards are building on 
concepts that are longstanding and familiar in ERISA and the common law 
of trusts and agency. Far from requiring adherence to novel standards 
with no antecedents, these conditions primarily require adherence to 
fundamental obligations of fair dealing and fiduciary conduct. In 
addition, the exemption and this preamble includes a section, below, 
designed to provide specific interpretations and responses to issues 
raised in connection with the Impartial Conduct Standards.
    In this regard, some commenters focused their comments on the 
Impartial Conduct Standards in the proposed Best Interest Contract 
Exemption and other proposals, as opposed to the proposed amendment to 
PTE 84-24. The Department determined it was important that the 
provisions of the exemptions, including the Impartial Conduct 
Standards, be uniform and compatible across exemptions. For this 
reason, the Department considered all comments made on any of the 
exemption proposals on a consolidated basis, and made corresponding 
changes across the projects. For ease of use, this preamble includes 
the same general discussion of comments as in the Best Interest 
Contract Exemption, despite the fact that some comments discussed below 
were not made directly with respect to this exemption.
a. Best Interest Standard
    Under Section II(a), the insurance agent or broker, pension 
consultant, insurance company or investment company principal 
underwriter must comply with a Best Interest standard when providing 
investment advice to the plan or IRA. The exemption provides that these 
parties act in the best interest of the plan or IRA when they:

act[] with the care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent person acting in a like 
capacity and familiar with such matters would use in the conduct of 
an enterprise of a like character and with like aims, based on the 
investment objectives, risk tolerance, financial circumstances and 
needs of the [p]lan or IRA, without regard to the financial or other 
interests of the fiduciary, any affiliate or other party.

    The Best Interest standard set forth in the amended exemption is 
based on longstanding concepts derived from ERISA and the law of 
trusts. It is meant to express the concept, set forth in ERISA section 
404, that a fiduciary is required to act ``solely in the interest of 
the participants . . . with the care, skill, prudence, and diligence 
under the circumstances then prevailing that a prudent man acting in a 
like capacity and familiar with such matters would use in the conduct 
of an enterprise of a like character and with like aims.'' Similarly, 
both ERISA section 404(a)(1)(A) and the trust-law duty of loyalty 
require fiduciaries to put the interests of trust beneficiaries first, 
without regard to the fiduciaries' own self-interest. Under this 
standard, for example, an investment advice fiduciary, in choosing 
between two investments, could not select an investment because it is 
better for the investment advice fiduciary's bottom line even though it 
is a worse choice for the plan or IRA.\52\
---------------------------------------------------------------------------

    \52\ The standard does not prevent investment advice fiduciaries 
relying on the exemption from restricting their recommended 
investments to proprietary products or products that generate 
revenue sharing. Section IV of the Best Interest Contract Exemption 
specifically addresses how the standard may be satisfied under such 
circumstances.

---------------------------------------------------------------------------

[[Page 21162]]

    A wide range of commenters indicated support for a broad ``best 
interest'' standard. Some comments indicated that the Best Interest 
standard is consistent with the way advisers provide investment advice 
to clients today. However, a number of these commenters expressed 
misgivings as to the definition used in the proposed exemption, in 
particular, the ``without regard to'' formulation. The commenters 
indicated uncertainty as to the meaning of the phrase, including: 
whether it permitted the investment advice fiduciary to be paid; 
whether it permitted investment advice on proprietary products; and 
whether it effectively precluded recommending annuities if they 
generate higher commissions than mutual funds.
    Other commenters asked that the exemption use a different 
definition of best interest, or simply use the exact language from 
ERISA's section 404 duty of loyalty. Others suggested definitional 
approaches that would require that the investment advice fiduciary 
``not subordinate'' their customers' interests to their own interests, 
or that the investment advice fiduciary ``put their customers' 
interests ahead of their own interests,'' or similar constructs.
    FINRA suggested that the federal securities laws should form the 
foundation of the Best Interest standard. Specifically, FINRA urged 
that the best interest definition in the exemption incorporate the 
``suitability'' standard applicable to investment advisers and broker-
dealers under federal securities laws. According to FINRA, this would 
facilitate customer enforcement of the Best Interest standard by 
providing adjudicators with a well-established basis on which to find a 
violation.
    Other commenters found the Best Interest standard to be an 
appropriate statement of the obligations of a fiduciary investment 
advice provider and believed it would provide concrete protections 
against conflicted recommendations. These commenters asked the 
Department to maintain the best interest definition as proposed. One 
commenter wrote that the term ``best interest'' is commonly used in 
connection with a fiduciary's duty of loyalty and cautioned the 
Department against creating an exemption that failed to include the 
duty of loyalty. Others urged the Department to avoid definitional 
changes that would reduce current protections to plans and IRAs. Some 
commenters also noted that the ``without regard to'' language is 
consistent with the recommended standard in the SEC staff Dodd-Frank 
Study, and suggested that it had the added benefit of potentially 
harmonizing with a future securities law standard for broker-dealers.
    The final exemption retains the best interest definition as 
proposed, with minor adjustments. The first prong of the standard was 
revised to more closely track the statutory language of ERISA section 
404(a) and is consistent with the Department's intent to hold 
investment advice fiduciaries to a prudent investment professional 
standard. Accordingly, the definition of best interest now requires 
advice that reflects ``the care, skill, prudence, and diligence under 
the circumstances then prevailing that a prudent person acting in a 
like capacity and familiar with such matters would use in the conduct 
of an enterprise of a like character and with like aims, based on the 
investment objectives, risk tolerance, financial circumstances and 
needs of the plan or IRA. . .'' The exemption adopts the second prong 
of the proposed definition, ``without regard to the financial or other 
interests of the fiduciary, any affiliate or other party,'' without 
change. The Department continues to believe that the ``without regard 
to'' language sets forth the appropriate, protective standard under 
which a fiduciary investment adviser should act. Although the exemption 
provides broad relief for fiduciary investment advisers to receive 
commissions based on their advice, the standard ensures that the advice 
will not be tainted by self-interest. Many of the alternative 
approaches suggested by commenters pose their own ambiguities and 
interpretive challenges, and lower standards run the risk of 
undermining this regulatory initiative's goal of reducing the impact of 
conflicts of interest on plans and IRAs.
    The Department has not specifically incorporated the suitability 
obligation as an element of the Best Interest standard, as suggested by 
FINRA but many aspects of suitability are also elements of the Best 
Interest standard. An investment recommendation that is not suitable 
under the securities laws would not meet the Best Interest standard. 
Under FINRA's Rule 2111(a) on suitability, broker-dealers ``must have a 
reasonable basis to believe that a recommended transaction or 
investment strategy involving a security or securities is suitable for 
the customer.'' The text of rule 2111(a), however, does not do any of 
the following: reference a best interest standard, clearly require 
brokers to put their client's interests ahead of their own, expressly 
prohibit the selection of the least suitable (but more remunerative) of 
available investments, or require them to take the kind of measures to 
avoid or mitigate conflicts of interests that are required as 
conditions of this exemption.
    The Department recognizes that FINRA issued guidance on Rule 2111 
in which it explains that ``in interpreting the suitability rule, 
numerous cases explicitly state that a broker's recommendations must be 
consistent with his customers' best interests,'' and provided examples 
of conduct that would be prohibited under this standard, including 
conduct that this exemption would not allow.\53\ The guidance goes on 
to state that ``[t]he suitability requirement that a broker make only 
those recommendations that are consistent with the customer's best 
interests prohibits a broker from placing his or her interests ahead of 
the customer's interests.'' The Department, however, is reluctant to 
adopt as an express standard such guidance, which has not been 
formalized as a clear rule and that may be subject to change. 
Additionally, FINRA's suitability rule may be subject to 
interpretations which could conflict with interpretations by the 
Department, and the cases cited in the FINRA guidance, as read by the 
Department, involved egregious fact patterns that one would have 
thought violated the suitability standard, even without reference to 
the customer's ``best interest.'' The scope of the guidance also is 
different than the scope of this exemption. For example, insurance 
providers who decide to accept conflicted compensation will need to 
comply with the terms of this exemption, but, in many instances, may 
not be subject to FINRA's guidance. Accordingly, after review of the 
issue, the Department has decided not to accept the comment. The 
Department has concluded that its articulation of a clear loyalty 
standard within the exemption, rather than by reference to the FINRA 
guidance, will provide clarity and certainty to investors, and better 
protect their interests.
---------------------------------------------------------------------------

    \53\ FINRA Regulatory Notice 12-25, p. 3 (2012).
---------------------------------------------------------------------------

    The Best Interest standard, as set forth in the exemption, is 
intended to effectively incorporate the objective standards of care and 
undivided loyalty that have been applied under ERISA for more than 40 
years. Under these objective standards, the investment advice fiduciary 
must adhere to a professional standard of care in making investment 
recommendations that are in the plan's or IRA's best interest. The 
investment advice fiduciary may not

[[Page 21163]]

base his or her recommendations on his or her own financial interest in 
the transaction. Nor may the investment advice fiduciary recommend the 
investment unless it meets the objective prudent person standard of 
care. Additionally, the duties of loyalty and prudence embodied in 
ERISA are objective obligations that do not require proof of fraud or 
misrepresentation, and full disclosure is not a defense to making an 
imprudent recommendation or favoring one's own interests at the plan's 
or IRA's expense.
    Several commenters requested additional guidance on the Best 
Interest standard. Investment advice fiduciaries that are concerned 
about satisfying the standard may wish to consult the policies and 
procedures requirement in Section II(d) of the Best Interest Contract 
Exemption. While these policies and procedures are not a condition of 
the PTE 84-24, they may provide useful guidance for financial 
institutions wishing to ensure that individual advisers adhere to the 
Impartial Conduct Standards. The preamble to the Best Interest Contract 
Exemption provides examples of policies and procedures prudently 
designed to ensure that advisers adhere to the Impartial Conduct 
Standards. The examples are not intended to be exhaustive or mutually 
exclusive, and they range from examples that focus on eliminating or 
nearly eliminating compensation differentials to examples that permit, 
but police, the differentials.
    A few commenters also questioned the requirement in the Best 
Interest standard that recommendations be made without regard to the 
interests of ``other parties.'' The commenters indicated they did not 
know the purpose of the reference to ``other parties'' and asked that 
it be deleted. The Department intends the reference to make clear that 
a fiduciary operating within the Impartial Conduct Standards should not 
take into account the interests of any party other than the plan or 
IRA--whether the other party is related to the fiduciary or not--in 
making a recommendation. For example, an entity that may be unrelated 
to the fiduciary but could still constitute an ``other party,'' for 
these purposes, is the manufacturer of the investment product being 
recommended.
    Other commenters asked for confirmation that the Best Interest 
standard is applied based on the facts and circumstances as they 
existed at the time of the recommendation, and not based on hindsight. 
Consistent with the well-established legal principles that exist under 
ERISA today, the Department confirms that the Best Interest standard is 
not a hindsight standard, but rather is based on the facts as they 
existed at the time of the recommendation. Thus, the courts have 
evaluated the prudence of a fiduciary's actions under ERISA by focusing 
on the process the fiduciary used to reach its determination or 
recommendation--whether the fiduciaries, ``at the time they engaged in 
the challenged transactions, employed the proper procedures to 
investigate the merits of the investment and to structure the 
investment.'' \54\ The standard does not measure compliance by 
reference to how investments subsequently performed or turn the 
fiduciaries relying on the exemption into guarantors of investment 
performance, even though they gave advice that was prudent and loyal at 
the time of transaction.\55\
---------------------------------------------------------------------------

    \54\ Donovan v. Mazzola, 716 F.2d 1226, 1232 (9th Cir. 1983).
    \55\ One commenter requested an adjustment to the ``prudence'' 
component of the Best Interest standard, under which the standard 
would be that of a ``prudent person serving clients with similar 
retirement needs and offering a similar array of products.'' In this 
way, the commenter sought to accommodate varying perspectives and 
opinions on particular investment products and business practices. 
The Department disagrees with the comment because it could be read 
as qualifying the stringency of the prudence obligation based on the 
financial institution's or adviser's independent decisions on which 
products to offer, rather than on the needs of the particular 
retirement investor. Therefore, the Department did not adopt this 
suggestion.
---------------------------------------------------------------------------

    This is not to suggest that the ERISA section 404 prudence standard 
or the Best Interest standard are solely procedural standards. Thus, 
the prudence obligation, as incorporated in the Best Interest standard, 
is an objective standard of care that requires the fiduciary relying on 
the exemption to investigate and evaluate investments, make 
recommendations, and exercise sound judgment in the same way that 
knowledgeable and impartial professionals would. ``[T]his is not a 
search for subjective good faith--a pure heart and an empty head are 
not enough.'' \56\ Whether or not the fiduciary is actually familiar 
with the sound investment principles necessary to make particular 
recommendations, the fiduciary must adhere to an objective professional 
standard. Additionally, fiduciaries are held to a particularly 
stringent standard to prudence when they have a conflict of 
interest.\57\ For this reason, the Department declines to provide a 
safe harbor based on ``procedural prudence'' as requested by a 
commenter.
---------------------------------------------------------------------------

    \56\ Donovan v. Cunningham, 716 F .2d 1455, 1467 (5th Cir. 
1983), cert. denied, 467 U.S. 1251 (1984); see also DiFelice v. U.S. 
Airways, Inc., 497 F. 3d 410, 418 (4th ir. 2007) (``Good faith does 
not provide a defense to a claim of a breach of these fiduciary 
duties; `a pure heart and an empty head are not enough.'')
    \57\ Donovan v. Bierwirth, 680 F.2d 263, 271 (2d Cir. 1982) 
(``the[ ] decisions [of the fiduciary] must be made with an eye 
single to the interests of the participants and beneficiaries''); 
see also Bussian v. RJR Nabisco, Inc., 223 F.3d 286, 298 (5th Cir. 
2000); Leigh v. Engle, 727 F.2d 113, 126 (7th Cir. 1984).
---------------------------------------------------------------------------

    The Department additionally confirms its intent that the phrase 
``without regard to'' be given the same meaning as the language in 
ERISA section 404 that requires a fiduciary to act ``solely in the 
interest of'' participants and beneficiaries, as such standard has been 
interpreted by the Department and the courts. Therefore, the standard 
would not, as some commenters suggested, foreclose the investment 
advice fiduciary from being paid. In response to concerns about the 
satisfaction of the standard in the context of proprietary product 
recommendations, the Department has provided additional clarity and 
specific guidance in the preamble on this issue.
    In response to commenter concerns, the Department also confirms 
that the Best Interest standard does not impose an unattainable 
obligation on investment advice fiduciaries to somehow identify the 
single ``best'' investment for the plan or IRA out of all the 
investments in the national or international marketplace, assuming such 
advice were even possible. Instead, as discussed above, the Best 
Interest standard set out in the exemption, incorporates two 
fundamental and well-established fiduciary obligations: the duties of 
prudence and loyalty. Thus, the advice fiduciary's obligation under the 
Best Interest standard is to give advice that adheres to professional 
standards of prudence, and to put the plan's or IRA's financial 
interests in the driver's seat, rather than the competing interests of 
the advice fiduciary or other parties.
    To the extent parties want more certainty as to compliance with the 
Impartial Conduct Standards, the Department refers them to examples 
provided in the Best Interest Contract Exemption's preamble discussion 
of policies and procedures that could be adopted to support compliance 
with the Impartial Conduct Standards.
    Finally, in response to questions regarding the extent to which 
this or other provisions impose an ongoing monitoring obligation on 
fiduciaries, the text does not impose a monitoring requirement. As 
noted in the preamble to the Best Interest Contract Exemption, 
adherence to a Best Interest standard does not mandate an ongoing or 
long-term relationship, but instead leaves that to agreements, 
arrangements, and

[[Page 21164]]

understandings of the parties. This is consistent with the Department's 
interpretation of an investment advice fiduciary's monitoring 
responsibility as articulated in the preamble to the Regulation.
b. Misleading Statements
    The second Impartial Conduct Standard, set forth in Section II(b), 
requires that

    The statements by the insurance agent or broker, pension 
consultant, insurance company or investment company Principal 
Underwriter about recommended investments, fees, Material Conflicts 
of Interest, and any other matters relevant to a Plan's or IRA 
owner's investment decisions, are not materially misleading at the 
time they are made.

    Section II(b) continues, ``[f]or this purpose, the insurance 
agent's or broker's, pension consultant's, insurance company's or 
investment company Principal Underwriter's failure to disclose a 
Material Conflict of Interest relevant to the services it is providing 
or other actions it is taking in relation to a Plan's or IRA owner's 
investment decisions is considered a misleading statement.'' In 
response to commenters, the Department adjusted the text to clarify 
that the standard is measured at the time of the representations, i.e., 
the statements must not be misleading ``at the time they are made.'' 
Similarly, the Department added a materiality standard in response to 
comments.
    Some comments focused on the proposed definition of Material 
Conflict of Interest. As proposed, a Material Conflict of Interest was 
defined to exist when a person has a financial interest that could 
affect the exercise of its best judgment as a fiduciary in rendering 
advice to a plan or IRA. Some commenters took the position that the 
proposal did not adequately explain the term ``material'' or 
incorporate a ``materiality'' standard into the definition. A commenter 
wrote that the proposed definition was so broad it would be difficult 
for financial institutions to comply with the various aspects of the 
exemption related to Material Conflicts of Interest, such as provisions 
requiring disclosures of Material Conflicts of Interest.
    Another commenter indicated that the Department should not use the 
term ``material'' in defining conflicts of interest. The commenter 
believed that it could result in a standard that was too subjective 
from the perspective of the investment advice fiduciary, and could 
undermine the protectiveness of the exemption.
    After consideration of the comments, the Department adjusted the 
definition of Material Conflict of Interest to provide that a material 
conflict of interest exists when a fiduciary has a ``financial interest 
that a reasonable person would conclude could affect the exercise of 
its best judgment as a fiduciary in rendering advice to a Plan or 
IRA.'' This language responds to concerns about the breadth and 
potential subjectivity of the standard.
    The Department did not accept certain other comments, however. One 
commenter requested that the Department add a qualifier providing that 
the standard is violated only if the statement was ``reasonably 
relied'' on by the retirement investor. The Department rejected the 
comment. The Department's aim is to ensure that investment advice 
fiduciaries uniformly adhere to the Impartial Conduct Standards, 
including the obligation to avoid materially misleading statements, 
when they give advice.
    One commenter asked the Department to require only that the adviser 
``reasonably believe'' the statements are not misleading. The 
Department is concerned that this standard too could undermine the 
protections of this condition by requiring retirement investors or the 
Department to prove the adviser's actual belief rather than focusing on 
whether the statement is objectively misleading. However, to address 
commenters' concerns about the risks of engaging in a prohibited 
transaction, as noted above, the Department has clarified that the 
standard is measured at the time of the representations and has added a 
materiality standard. The Department believes that plans and IRAs are 
best served by statements and representations that are free from 
material misstatements. Investment advice fiduciaries best avoid 
liability--and best promote the interests of plans and IRAs--by making 
accurate communications a consistent standard in all their interactions 
with their customers.
    Another commenter suggested that the Department adopt FINRA's 
``Frequently Asked Questions regarding Rule 2210'' in this 
connection.\58\ FINRA's Rule 2210, Communications with the Public, sets 
forth a number of procedural rules and standards that are designed to, 
among other things, prevent broker-dealer communications from being 
misleading. The Department agrees that adherence to FINRA's standards 
can promote materially accurate communications, and certainly believes 
that investment advice fiduciaries should pay careful attention to such 
guidance documents. After review of the rule and FAQs, however, the 
Department declines to simply adopt FINRA's guidance, which addresses 
written communications, since the exemption is broader in this respect. 
In the Department's view, the meaning of the standard is clear, and is 
already part of plan fiduciary's obligations under ERISA. If, however, 
issues arise in implementation of the exemption, the Department will 
consider requests for additional guidance.
---------------------------------------------------------------------------

    \58\ Currently available at http://www.finra.org/industry/finra-rule-2210-questions-and-answers.
---------------------------------------------------------------------------

c. Other Interpretive Issues
    Some commenters asserted that some of the exemption's terms were 
too vague and would result in the exemption failing to meet the 
``administratively feasible'' requirement under ERISA section 408(a) 
and Code section 4975(c)(2). The Department disagrees with these 
commenters' suggestion that ERISA section 408(a) and Code section 
4975(c)(2) fail to be satisfied by this exemption's principles-based 
approach, or that the exemption's standards are unduly vague. It is 
worth repeating that the Impartial Conduct Standards are built on 
concepts that are longstanding and familiar in ERISA and the common law 
of trusts and agency. Far from requiring adherence to novel standards 
with no antecedents, the exemption primarily requires adherence to 
basic well-established obligations of fair dealing and fiduciary 
conduct. This section is designed to provide specific interpretations 
and responses to a number of specific issues raised in connection with 
a number of the Impartial Conduct Standards.
    In this regard, the Department received several comments regarding 
the sale of proprietary insurance products. Generally, commenters 
expressed concern that the proposed amendments to the exemption 
appeared to be setting barriers to the sale of proprietary products, 
and the receipt of differential compensation such as commissions and 
health benefits and the ability to earn a profit inherent in such 
sales. Commenters maintained that the advantages of a proprietary sales 
force include the in-depth training received by such agents on the 
proprietary products. Comments requested that the Department clarify 
whether PTE 84-24 continues to cover the sale of proprietary products 
and the receipt of differential compensation as a result of the sale.
    In response to commenters, the Department specifically notes that 
the Impartial Conduct Standards (either as proposed or finalized) are 
not properly

[[Page 21165]]

interpreted to foreclose the recommendation of proprietary products. 
The Department recognizes that insurance sales frequently involve 
proprietary products, and it does not intend to forbid such sales. 
Section IV of the Best Interest Contract Exemption specifically 
addresses the Best Interest standard in the context of proprietary 
products. While not a specific condition of this exemption, financial 
institutions would clearly satisfy the standard by complying with the 
requirements of that section.
    The Impartial Conduct Standards also are not properly interpreted 
to foreclose the receipt of commissions or other transaction-based 
payments. To the contrary, a significant purpose of granting this 
amended exemption is to continue to permit such payments, as long as 
investment advice fiduciaries are willing to adhere to Best Interest 
standards. In particular, the Department confirms that the receipt of a 
commission on an annuity product does not result in a per se violation 
of any of the Impartial Conduct Standards or other conditions of the 
exemption, even though such a commission may be greater than the 
commission on a mutual fund purchase of the same amount as long as the 
commission meets the requirement of ``reasonable compensation'' and 
other applicable conditions.
    Several commenters stated the Impartial Conduct Standards could be 
interpreted to exclude any compensation other than commissions paid to 
the agent, such as employee benefits for agents selling the insurance 
companies' proprietary products and meeting production goals. The 
commenters pointed out that many insurance companies use a business 
model whereby their agents are statutory employees under the Code. In 
order to receive employee benefits, the agents must predominately sell 
the employing insurance companies' products. Commenters argued that the 
provision of employee benefits such as health care and retirement 
benefits does not create a conflict of interest.
    The Department did not intend the exemption to effectively prohibit 
the receipt of employee benefits by statutory employees. The final 
exemption makes clear in Section I(b)(1) that such payments can be 
provided. Additionally, the Department confirms that the receipt by an 
insurance agent or broker of reasonable and customary deferred 
compensation or subsidized health or pension benefit arrangements such 
as typically provided to an ``employee'' as defined in Code section 
3121(d)(3) does not, in and of itself, violate the Impartial Conduct 
Standards. However, insurance companies providing such payments should 
take special care that the payments do not undermine such insurance 
agents' or brokers' ability to adhere to the standards.
    Some commenters urged the Department to state that fiduciary status 
does not apply to the manufacturer company that issues an annuity, 
insurance or investment product in the ordinary course of its business 
so long as the company and its employees do not render investment 
advice for a fee or represent that it is acting as a fiduciary. Another 
commenter expressed the opinion that the sale of proprietary products 
should not in and of itself create a fiduciary relationship. The 
Department responds that application of the Regulation determines the 
status of investment advice fiduciaries. This exemption provides relief 
that is necessary for parties with fiduciary status under the 
Regulation. However, the Department notes that the Best Interest 
Contract Exemption requires that a financial institution (which could 
be an insurer) acknowledge fiduciary status, ensure that an appropriate 
supervisory structure is in place to implement policies and procedures, 
police incentives, and generally oversee the conduct of individual 
advisers, so that the conduct comports with the fiduciary norms 
required in the Impartial Conduct Standards.

Commissions

    While PTE 84-24 provides an exemption for the specified parties to 
receive commissions in connection with the purchase of insurance or 
annuity contracts and investment company securities, it did not contain 
a separate definition of commission. The Department has viewed the 
exemption as limited to sales commissions on insurance or annuity 
contracts and investment company securities, as opposed to any related 
or alternative forms of compensation. This exemption was originally 
granted in 1977, and the conditions were crafted with simple commission 
payments in mind. In the interim, the exemption was not amended or 
formally interpreted to broadly permit more types of payments. To 
provide certainty with respect to the payments permitted by the 
exemption, however, the amended exemption now provides a specific 
definition of Insurance Commission and Mutual Fund Commission.
    These definitions should dispel any concern that commissions are no 
longer permitted under the exemption, or that the Impartial Conduct 
Standards cannot be satisfied with respect to such commission payments. 
This exemption remains specifically available for commissions as they 
are defined herein. Moreover, as noted above, the Department confirms 
that the receipt of a commission on an annuity product does not, in and 
of itself, violate any of the Impartial Conduct Standards, even though 
such a commission would be greater than the commission on a mutual fund 
purchase of the same amount.
    In the final amendment, Section VI(f) defines an Insurance 
Commission to mean a sales commission paid by the insurance company to 
the insurance agent, insurance broker or pension consultant for the 
service of effecting the purchase of an insurance or annuity contract, 
including renewal fees and trailers that are paid in connection with 
the purchase of the insurance or annuity contract.\59\ The term 
Insurance Commission does not include revenue sharing payments, 
administrative fees or marketing fees. Similarly, Section VI(i) of the 
exemption defines Mutual Fund Commission as ``a commission or sales 
load paid either by the Plan or the investment company for the service 
of effecting or executing the purchase of investment company 
securities, but does not include a 12b-1 fee, revenue sharing payment, 
administrative fee, or marketing fee.'' \60\
---------------------------------------------------------------------------

    \59\ The proposed definition of Insurance Commission included 
commissions paid on the ``purchase or sale'' of an insurance or 
annuity contract. Because the exemption extends only to the 
commissions on the purchase of an insurance or annuity contract, the 
language ``or sale'' was deleted in this final amendment.
    \60\ The proposed definition of Mutual Fund Commission included 
commissions paid for the service of effecting or executing the 
``purchase or sale'' of investment company securities. Because the 
exemption extends only the commissions on the purchase of investment 
company securities, the language ``or sale'' was deleted in this 
final amendment.
---------------------------------------------------------------------------

    The definition of Insurance Commission in the final amendment was 
revised slightly from the proposed amendment. As proposed, the 
definition excluded ``revenue sharing payments, administrative fees or 
marketing payments, or payments from parties other than the insurance 
company or its Affiliates.'' Commenters questioned whether the phrase 
``or payments from parties other than the insurance company or its 
Affiliates'' would require a direct payment from the insurance company, 
and thought this appeared to conflict with the description of the 
covered transaction in Section I(a), which specifically says the 
exemption applies to ``direct and indirect''

[[Page 21166]]

payments. Commenters explained that commissions may be paid to 
insurance agents, insurance brokers and pension consultants, through 
other intermediaries.
    It was not the Department's intent with respect to the Insurance 
Commission definition to disrupt the practice of paying commissions 
through a third party, such as an independent marketing organization. 
Accordingly the final amendment does not include the language 
``payments from parties other than the insurance company or its 
Affiliates'' from the definition. The Department nevertheless cautions 
that the change does not extend relief under the exemption to revenue 
sharing or other payments not within the definition of Insurance 
Commission.\61\
---------------------------------------------------------------------------

    \61\ Under the exemption, the term ``insurance company'' 
includes the insurance company and its affiliates.
---------------------------------------------------------------------------

    A few commenters have requested that the Department clarify whether 
or not ``gross dealer concessions'' or ``overrides'' would be 
considered Insurance Commissions under the new definition. The 
commenters explained that ``gross dealer concessions'' and 
``overrides'' are commission payments made to someone who oversees the 
agent that is working directly with the customer. The Department 
responds that, as these types of payments generally represent a portion 
of the overall commission payment associated with an insurance or 
annuity transaction, they are included within the amended exemption's 
definition of Insurance Commission. In connection with this 
clarification, however, the Department revised the disclosure 
conditions to reflect that both the agent's or broker's commission and 
the gross dealer concession or override must be disclosed if the 
exemption is relied upon for such payments.
    Many of the comments received from the industry expressed the 
opinion more generally that the proposed definitions of Insurance 
Commission and Mutual Fund Commission were too narrow and should be 
expanded to include the receipt of all types of payments for all sales 
of annuities and mutual funds such as revenue sharing payments, 
administrative fees, marketing fees and 12b-1 fees. Commenters stated 
that due to the increased disclosures required by the Department and 
the Securities and Exchange Commission's simplification of the 
disclosures for 12b-1 fees and other mutual fund fees in prospectuses 
there is no reason why any form of disclosed and agreed upon 
compensation should not be allowed. Some commenters stated that the 
definition of Insurance Commission in the proposal would create 
uncertainty in the industry as to what is permissible compensation 
under PTE 84-24 and may cause reduction in sales of annuity products 
that provide valuable lifetime income benefits. These commenters argued 
that the exclusion of revenue sharing payments, administrative fees or 
marketing payments is inconsistent with current business models and 
would create ambiguity with respect to long standing industry practices 
under which such payments are received. They stated that such 
restrictions would not be necessary in light of the Best Interest 
standard.
    Some commenters represented that revenue sharing payments are 
received by the insurance company or financial institution, itself, as 
opposed to the individual adviser, and are used to offset expenses 
related to servicing the annuity contract or mutual fund account and 
therefore do not create a conflict of interest at the agent level or 
point of sale. Additionally, one commenter asserted that revenue 
sharing and marketing fees are not retained but instead credited back 
on a daily basis to the insurance company separate account to offset 
other fees of the separate account and therefore are credited back to 
the participants invested in that separate account. A few other 
commenters argued that the conflicts of interest arising from revenue 
sharing, administrative fees and marketing fees can be addressed by 
only allowing the payments when they are paid on the basis of total 
aggregate sales and are not linked to a specific investment product.
    The Department was not persuaded by these comments to expand the 
definitions of Insurance Commission or Mutual Fund Commission beyond 
the historical intent of the exemption. The Department specifically 
provided relief for such payments in the Best Interest Contract 
Exemption. That exemption addresses the payment structures that have 
developed since PTE 84-24 was originally adopted. The Department 
intends that relief for such payments be provided through the Best 
Interest Contract Exemption on the grounds that that exemption was 
drafted to specifically address the unique conflicts of interest that 
are created by these types of payments.
    In addition, it is the Department's understanding that third party 
payments such as revenue sharing and 12b-1 fees generally are not paid 
in connection with the Fixed Rate Annuity Contracts that are covered by 
the amended exemption. The expanded definitions are, therefore, 
unnecessary because the investments that would generate such payments 
are covered by the Best Interest Contract Exemption, rather than this 
exemption.
    The Department does not believe this exemption was properly 
interpreted over the years to provide relief for payments such as 
administrative services fees, which are not akin to a commission. No 
determination has been made that the conditions of the exemption are 
protective in the context of such payments. Without further information 
on these fees, or suggested additional conditions addressed at these 
types of payments, the Department declines to take such an expansive 
approach to relief from the prohibited transaction rules under the 
terms of this exemption. For parties who are interested in broader 
relief in this area, the Best Interest Contract Exemption is available.

Reasonable Compensation

    Section III(c) of the amended exemption imposes a reasonable 
compensation standard as a condition of the exemption. The requirement 
is that:

    The combined total of all fees and compensation received by the 
insurance agent or broker, pension consultant, insurance company or 
investment company Principal Underwriter for their services does not 
exceed reasonable compensation within the meaning of ERISA section 
408(b)(2) and Code section 4975(d)(2).

    The language of the requirement differs from the definition in the 
proposal, but it is not intended as a substantive change. The language 
in the proposal provided:

    The combined total of all fees, Insurance Commissions, Mutual 
Fund Commissions and other consideration received by the insurance 
agent or broker, pension consultant, insurance company, or 
investment company Principal Underwriter:
    (1) For the provision of services to the plan or IRA; and
    (2) In connection with the purchase of insurance or annuity 
contracts or securities issued by an investment company is not in 
excess of ``reasonable compensation'' within the contemplation of 
section 408(b)(2) and 408(c)(2) of the Act and sections 
4975(d)(2)and 4975(d)(10) of the Code. If such total is in excess of 
``reasonable compensation,'' the ``amount involved'' for purposes of 
the civil penalties of section 502(i) of the Act and the excise 
taxes imposed by section 4975 (a) and (b) of the Code is the amount 
of compensation in excess of ``reasonable compensation.''

    The language was changed in the amendment to correspond to the same 
provision in the Best Interest Contract Exemption. Commenters indicated 
that there should be a common reasonable compensation standard across 
the exemptions. Commenters on the Best

[[Page 21167]]

Interest Contract Exemption also expressed a preference for a reference 
to the ERISA section 408(b)(2) and Code section 4975(d)(2) provisions 
on reasonable compensation.
    More generally, commenters asked that the Department provide more 
certainty as to the meaning of the reasonable compensation standard. 
There was concern that the standard could be applied retroactively 
rather than based on the parties' reasonable beliefs as to the 
reasonableness of the compensation at the time of the recommendation. 
Commenters also indicated uncertainty as to how to comply with the 
condition and asked whether it would be necessary to survey the market 
to determine market rates. Some commenters requested that the 
Department include the words ``and customary'' in the reasonable 
compensation definition, to specifically permit existing compensation 
arrangements. One commenter raised the concern that the reasonable 
compensation determination raised antitrust concerns because it would 
require investment advice fiduciaries to agree upon a market rate and 
result in anti-competitive behavior.
    Commenters also asked how the standard would be satisfied for 
Proprietary Products, particularly insurance and annuity contracts. In 
such a case, commenters indicated, the retirement investor is not only 
paying for a service, but also for insurance guarantees; a standard 
that appeared to focus solely on services appeared inapposite. 
Commenters asked about the treatment of the insurance company's spread, 
which was described, in the case of a fixed annuity, or the fixed 
component of a variable annuity, as the difference between the fixed 
return credited to the contract holder and the insurer's general 
account investment experience. One commenter indicated that the 
calculation should not include affiliates' or related entities' 
compensation as this would appear to put them at a comparative 
disadvantage.
    The Department confirms that the standard is the same as the well-
established requirement set forth in ERISA section 408(b)(2) and Code 
section 4975(d)(2), and the regulations thereunder. The reasonableness 
of the fees depends on the particular facts and circumstances at the 
time of the recommendation. Several factors inform whether compensation 
is reasonable including, inter alia, the market pricing of service(s) 
provided and the underlying asset(s), the scope of monitoring, and the 
complexity of the product. No single factor is dispositive in 
determining whether compensation is reasonable; the essential question 
is whether the charges are reasonable in relation to what the investor 
receives. Consistent with the Department's prior interpretations of 
this standard, the Department confirms that parties relying on this 
exemption do not have to recommend the investment that is the lowest 
cost or that generates the lowest fees without regard to other relevant 
factors. Recommendation of the lowest cost or lowest fee product is 
also not a requirement under the Impartial Conduct Standards in Section 
II of the exemption.
    Some commenters suggested that the reasonable compensation 
determination be made by another plan fiduciary. However, the exemption 
(like the statutory obligation) obligates investment advice fiduciaries 
to avoid overcharging their plan and IRA customers, despite any 
conflicts of interest associated with their compensation. Fiduciaries 
and other service providers may not charge more than reasonable 
compensation regardless of whether another fiduciary has signed off on 
the compensation. The reasonable compensation condition has long been 
required under PTE 84-24 and the approach in the final amendment is 
consistent with other class exemptions granted and amended today. 
Nothing in the exemptions, however, precludes fiduciaries from seeking 
impartial review of their fee structures to safeguard against abuse, 
and they may well want to include such reviews in their policies and 
procedures.
    Further, the Department disagrees that the requirement is 
inconsistent with antitrust laws. Nothing in the exemption contemplates 
or requires that advisers or financial institutions agree upon a price 
with their competitors. The focus of the reasonable compensation 
condition is on preventing overcharges to plans and IRAs, not promoting 
anti-competitive practices. Indeed, if advisers and financial 
institutions consulted with competitors to set prices, the agreed-upon 
price could well violate the condition.
    In response to concerns about application of the standard to 
investment products that bundle together services and investment 
guarantees or other benefits, such as annuities, the Department 
responds that the reasonable compensation condition is intended to 
apply to the compensation received by the financial institution, 
adviser, and any Affiliates in same manner as the reasonable 
compensation condition set forth in ERISA section 408(b)(2) and Code 
section 4975(d)(2). Accordingly, the exemption's reasonable 
compensation standard covers compensation received directly from the 
plan or IRA and indirect compensation received from any source other 
than the plan or IRA in connection with the recommended 
transaction.\62\ In the case of a charge for an annuity or insurance 
contract that covers both the provision of services and the purchase of 
the guarantees and financial benefits provided under the contract, it 
is appropriate to consider the value of the guarantees and benefits in 
assessing the reasonableness of the arrangement, as well as the value 
of the services. When assessing the reasonableness of a charge, one 
generally needs to consider the value of all the services and benefits 
provided for the charge, not just some. If parties need additional 
guidance in this respect, they should refer to the Department's 
interpretations under ERISA section 408(b)(2) and Code section 
4975(d)(2) and the Department will provide additional guidance if 
necessary.
---------------------------------------------------------------------------

    \62\ Such compensation includes, for example charges against the 
investment, such as commissions, sales loads, sales charges, 
redemption fees, surrender charges, exchange fees, account fees and 
purchase fees, as well as compensation included in operating 
expenses and other ongoing charges, such as wrap fees, mortality, 
and expense fees. For purposes of this exemption, the ``spread'' is 
not treated as compensation. A commenter described the ``spread'', 
in the case of a fixed annuity, or the fixed component of a variable 
annuity, as the difference between the fixed return credited to the 
contract holder and the insurer's general account investment 
experience.
---------------------------------------------------------------------------

    A commenter urged the Department to provide that compensation 
received by an Affiliate would not have to be considered in applying 
the reasonable compensation standard. According to the commenter, 
including such compensation in the assessment of reasonable 
compensation would place proprietary products at a disadvantage. The 
Department disagrees with the proposition that a proprietary product 
would be disadvantaged merely because more of the compensation goes to 
affiliated parties than in the case of competing products, which 
allocate more of the compensation to non-affiliated parties. The 
availability of the exemption, however, does not turn on how 
compensation is allocated between affiliates and non-affiliates. 
Certainly, the Department would not expect that a proprietary product 
would be at a disadvantage in the marketplace because it carefully 
ensures that the associated compensation is reasonable. Assuming the 
Best Interest standard is satisfied and the compensation is reasonable, 
the exemption should not impede the recommendation of

[[Page 21168]]

proprietary products. Accordingly, the Department disagrees with the 
commenter.
    The Department declines suggestions to provide specific examples of 
``reasonable'' amounts or specific safe harbors, as requested by some 
commenters. Ultimately, the ``reasonable compensation'' standard is a 
market based standard. At the same time, the Department is unwilling to 
condone all ``customary'' compensation arrangements and declines to 
adopt a standard that turns on whether the agreement is ``customary.'' 
For example, it may in some instances be ``customary'' to charge 
customers fees that are not transparent or that bear little 
relationship to the value of the services actually rendered, but that 
does not make the charges reasonable.

Conditions for Transaction Described in Section I(a)(1) Through (4)

    Section IV establishes certain conditions and limitations 
applicable to the transactions described in Section I(b)(1)-(4). 
Section IV(a) identifies certain parties that may not rely on the 
exemption, including discretionary trustees, plan administrators, 
fiduciaries expressly authorized in writing to manage, acquire or 
dispose of the asset of the plan or IRA on a discretionary basis, and 
employers of employees covered by a plan. Section IV(b) and (c) 
establish pre-transaction disclosures and approval requirements, and 
Section IV(d) indicates when repeat disclosures must be provided.
    One commenter asked about the applicability of these conditions to 
transactions described in Section I(b)(5) and (6), which generally 
relate to master and prototype plan sponsors. The commenter expressed 
the view that these transactions should not be excluded from the 
conditions of Section IV.
    The covered transactions described in Section I(b)(5) and (6) are 
narrowly tailored to apply to the provider of a master or prototype 
plan that receives compensation in connection with a transaction 
involving an insurance or Fixed Rate Annuity Contract, or investment 
company securities. The preamble to PTE 77-9, the predecessor of PTE 
84-24, stated that the transactions are limited to the circumstances 
where the insurance company, investment company or investment company 
principal underwriter is a fiduciary or service provider to a plan 
solely by reason of sponsorship of a master or prototype plan but has 
no other relationship to the plan, such as being the investment adviser 
to the plan directly or through an affiliate.\63\ Therefore, the relief 
provided does not extend to the circumstances in which the insurance 
company or mutual fund principal underwriter is causing itself to 
receive compensation. Given the limited nature of the exemption, the 
Department found it appropriate to provide different conditions for 
this transaction.
---------------------------------------------------------------------------

    \63\ 42 FR 32395 (June 24, 1977).
---------------------------------------------------------------------------

a. Section IV(b) and (c)--Transaction Disclosure

    Section IV(b) sets forth disclosure and consent requirements for 
Fixed Rate Annuity Contracts and insurance contracts. As amended, the 
exemption imposes the following conditions:

    (b)(1) With respect to a transaction involving the purchase with 
Plan or IRA assets of a Fixed Rate Annuity Contract or insurance 
contract, or the receipt of an Insurance Commission thereon, the 
insurance agent or broker or pension consultant provides to an 
independent fiduciary with respect to the Plan, or in the case of an 
IRA, to the IRA owner, prior to the execution of the transaction the 
following information in writing and in a form calculated to be 
understood by a plan fiduciary or IRA owner who has no special 
expertise in insurance or investment matters:
    (A) If the agent, broker, or consultant is an Affiliate of the 
insurance company whose contract is being recommended, or if the 
ability of the agent, broker or consultant to recommend Fixed Rate 
Annuity Contracts or insurance contracts is limited by any agreement 
with the insurance company, the nature of the affiliation, 
limitation, or relationship;
    (B) The Insurance Commission, expressed to the extent feasible 
as an absolute dollar figure, or otherwise, as a percentage of gross 
annual premium payments, asset accumulation value or contract value, 
for the first year and for each of the succeeding renewal years, 
that will be paid directly or indirectly by the insurance company to 
the agent, broker, or consultant in connection with the purchase of 
the recommended contract, including, if applicable, separate 
identification of the amount of the Insurance Commission that will 
be paid to any other person as a gross dealer concession, override, 
or similar payment; and
    (C) A statement of any charges, fees, discounts, penalties or 
adjustments which may be imposed under the recommended contract in 
connection with the purchase, holding, exchange, termination, or 
sale of the contract.

    Subsection (B) of this condition was revised in several respects 
from the existing language of the exemption. Originally, the exemption 
provided that disclosure must be made of ``[t]he sales commission, 
expressed as a percentage of gross annual premium payments for the 
first year and for each of the succeeding renewal years, that will be 
paid by the insurance company to the agent, broker or consultant in 
connection with the purchase of the recommended contract.'' Some 
commenters requested that the Insurance Commission be expressed as a 
percentage of asset accumulation value or contract value, in addition 
to the gross annual premium payments. Another commenter indicated that 
in some cases, such as a retirement benefit contribution paid to an 
agent that is considered an Insurance Commission, it is difficult to 
represent the Insurance Commission as a percentage and therefore 
requested that a dollar figure be permitted. The Department accepted 
these comments, and indicated that all Insurance Commissions should be 
expressed as a dollar figure unless that is not feasible, in which case 
a percentage will be permitted. Expression of the Insurance Commission 
as a dollar amount results in an accurate, salient and simple 
disclosure that facilitates a clearer understanding of the conflicts 
associated with the investment. But where it is difficult to express 
Insurance Commissions in dollars, the disclosure will allow for 
percentage disclosures.
    A commenter also questioned whether the required disclosure for 
commissions would encompass payments made to the agent indirectly by 
entities other than the insurance company. The Department revised the 
language of subsection (B) to indicate disclosure must be made of the 
Insurance Commission paid directly or indirectly by the insurance 
company. As explained in the definition of Insurance Commission and 
discussed above, the amended exemption more clearly sets forth the 
exemption's historical limitation to such payments.
    Subsection (C) was minimally revised to provide that the exemption 
requires a ``statement'' of any charges, fees, discounts, penalties or 
adjustments, rather than a ``description.'' This change was made to 
ensure that the level of specificity provided by the disclosures is not 
limited to an unduly general narrative description but rather to a more 
precise statement of the amounts of these charges, fees, discounts, 
penalties or adjustments. However, the statement can reference dollar 
amounts, percentages, formulas, or other means reasonably designed to 
present materially accurate disclosure. Similar language is used in the 
Best Interest Contract Exemption disclosures, and the change was made 
to correspond to the approach in that exemption.
    For consistency across exemptions, the Department made 
corresponding amendments to the language in Section

[[Page 21169]]

IV(c), which sets forth the disclosure provisions applicable to 
investment company transactions.
    Regarding the disclosures, a few commenters stated that the 
requirement to disclose the gross annual premium payments in year 1 and 
in succeeding years, as well as to describe any fees, charges, 
penalties, discounts or adjustments under the contract, would be 
difficult because independent broker-dealers do not create, maintain, 
or compile this type of information, and would need to expend 
significant resources to develop systems to compile or obtain the 
information to be disclosed. Another commenter argued the Department 
should limit the disclosure of compensation to the commissions as it 
would be impossible to disclose all additional forms of compensation.
    These disclosure requirements are not new conditions, however, but 
rather have been a part of this exemption since it was initially 
granted in 1977,\64\ and are an integral part of the exemption, which 
aims to ensure full disclosure of material conflicts of interest, so 
that retirement investors can make fully informed choices. The 
Department did not make changes in response to the comment because 
these disclosures are necessary to informing the plan or IRA customer 
of the fiduciary's conflicts.
---------------------------------------------------------------------------

    \64\ See PTE 77-9, 42 FR 32395 (June 24, 1977) (predecessor to 
PTE 84-24).
---------------------------------------------------------------------------

b. Section IV(b)(2) and (c)(2)--Approval

    Additional clarifying changes were also made to Section IV(b)(2) 
which addresses approval of the transaction following receipt of the 
disclosure. In the amended exemption, Section IV(b)(2) provides:

    Following the receipt of the information required to be 
disclosed in paragraph (b)(1), and prior to the execution of the 
transaction, the fiduciary or IRA owner acknowledges in writing 
receipt of the information and approves the transaction on behalf of 
the Plan or IRA. The fiduciary may be an employer of employees 
covered by the Plan but may not be an insurance agent or broker, 
pension consultant, or insurance company involved in the transaction 
(i.e., an independent fiduciary). The independent fiduciary may not 
receive, directly or indirectly (e.g., through an Affiliate), any 
compensation or other consideration for his or her own personal 
account from any party dealing with the Plan in connection with the 
transaction.

    The section in the originally granted exemption referred to 
acknowledgment of the disclosure and approval by an ``independent 
fiduciary.'' The language stated:

    Following the receipt of the information required to be 
disclosed in paragraph (b)(1), and prior to the execution of the 
transaction, the independent fiduciary acknowledges in writing 
receipt of such information and approves the transaction on behalf 
of the plan. Such fiduciary may be an employer of employees covered 
by the plan, but may not be an insurance agent or broker, pension 
consultant or insurance company involved in the transaction. Such 
fiduciary may not receive, directly or indirectly (e.g. through an 
affiliate), any compensation or other consideration for his or her 
own personal account from any party dealing with the plan in 
connection with the transaction.

    Commenters asked for clarification of this requirement in the 
context of IRAs. The Department revised the language of the section to 
indicate that the independent fiduciary or IRA owner must provide this 
acknowledgment and approval.
    This change addresses another issue, raised by commenters, 
regarding the independence requirement as applicable to IRA owners. 
Under the original independence requirement, the fiduciary approving 
the transaction may not be the insurance agent or broker, pension 
consultant, or insurance company involved in the transaction (or an 
affiliate, including a family member). The Department did not add ``or 
IRA owner'' to this independence requirement and accordingly confirms 
that the independence requirement does not apply to IRA owners. This 
allows insurance agents and brokers to recommend Fixed Rate Annuity 
Contracts and insurance contracts to family members and receive a 
commission. The Department did not make corresponding changes to 
Section IV(c)(2) because transactions with IRAs involving investment 
company securities are not covered by the exemption.
    Some commenters asked for a negative consent procedure in Section 
IV(b)(2) in which consent could be demonstrated by a failure to object 
to a written disclosure. They referenced Section IV(c)(2), which is 
applicable to investment company transactions, and states that 
``[u]nless facts or circumstances would indicate the contrary, the 
approval may be presumed if the fiduciary permits the transaction to 
proceed after receipt of the written disclosure.''
    The Department declined to adjust the consent procedure in the 
context of Fixed Rate Annuity Contract and insurance contract sales. 
The Department believes that investments in these products are 
significant enough that a negative consent procedure is not warranted.

c. Section IV(d)--Repeat Disclosures

    Finally, a revision was made to Section IV(d), which sets forth the 
requirement for disclosure to be made in connection with additional 
purchases of Fixed Rate Annuity Contracts, insurance contracts, or 
securities issued by an investment company. Under the revised 
condition, the written disclosure required under Section IV(b) and (c) 
need not be repeated, unless:

    (1) More than one year has passed since the disclosure was made 
with respect to the purchase of the same kind of contract or 
security, or
    (2) The contract or security being recommended for purchase or 
the Insurance Commission or Mutual Fund Commission with respect 
thereto is materially different from that for which the approval 
described in paragraphs (b) and (c) of this Section was obtained.

    This requirement was changed from three years, in the existing 
exemption, to one year in the final amendment. This change corresponds 
to the approach taken in the Best Interest Contract Exemption that 
these types of disclosures should be made on at least an annual basis. 
For example, in the Best Interest Contract Exemption, the transaction 
disclosure required by Section III(a) is required to be repeated on an 
annual basis with respect to additional recommendations of the same 
investment. This reflects the Department's view that if conflicted 
arrangements exist, plans and IRAs should receive sufficient notice to 
enable them to provide informed consent to the transaction, and a one 
year interval is the appropriate time in which the disclosure should be 
repeated, under the circumstances of this exemption as well as the Best 
Interest Contract Exemption.
    In addition, the language was revised so that the one year period 
runs from the purchase of an annuity. If any disclosures were given 
with respect to a recommendation that was not acted upon by the 
customer, the one year period does not apply.
    In connection with the changes to this section, the Department 
clarified in the introductory language that these disclosures are 
required to be made only with respect to additional transactions that 
are recommended by the investment advice fiduciary.

Recordkeeping

    Section V of the amended exemption includes a recordkeeping 
requirement under which the insurance agent or broker, pension 
consultant, insurance company, or investment company principal 
underwriter engaging in the transaction must maintain records of the

[[Page 21170]]

transaction for six years, accessible for audit and examination. A 
commenter on this provision recommended that the word ``reasonably'' be 
inserted prior to the term ``accessible.'' The commenter asserted that 
this clarification would remove the subjective views of the person 
requesting to examine or audit the records. The commenter also 
recommended that the Department clarify that fiduciaries, employers, 
employee organizations, participants, and their employees and 
representatives only have access to information concerning their own 
plans. This commenter also stated the exemption should clarify that any 
failure to maintain the required records with respect to a given 
transaction or set of transactions does not affect the relief for other 
transactions.
    The Department has accepted these comments and made the requested 
revisions. Thus, the Department specifically clarified that ``[f]ailure 
to maintain the required records necessary to determine whether the 
conditions of this exemption have been met will result in the loss of 
the exemption only for the transaction or transactions for which 
records are missing or have not been maintained. It does not affect the 
relief for other transactions.'' In addition, in accordance with other 
exemptions granted and amended today, financial institutions are also 
not required to disclose records if such disclosure would be precluded 
by 12 U.S.C. 484, relating to visitorial powers over national banks and 
federal savings associations.\65\
---------------------------------------------------------------------------

    \65\ A commenter with respect to the Best Interest Contract 
Exemption raised concerns that the Department's right to review a 
bank's records under that exemption could conflict with federal 
banking laws that prohibit agencies other than the Office of the 
Comptroller of the Currency (OCC) from exercising ``visitorial'' 
powers over national banks and federal savings associations. To 
address the comment, financial institutions are not required to 
disclose records if the disclosure would be precluded by 12 U.S.C. 
484. A corresponding change was made in this exemption.
---------------------------------------------------------------------------

Definitions

    The definition of ``Plan,'' set forth in Section VI(l) of the 
amended exemption, provides that a Plan means any employee benefit plan 
described in section 3(3) of the Act and any plan described in section 
4975(e)(1)(A) of the Code. The proposal did not contain a definition of 
Plan. This definition was added in response to commenters who 
questioned the exemption's application to plans such as Simplified 
Employee Pensions (SEPs), Savings Incentive Match Plans for Employees 
(SIMPLEs) and Keoghs. The Department intends for the definition of Plan 
to include all of these plans.
    The definition of ``relative'' set forth in Section VI(n) refers to 
a ``relative'' as that term is defined in ERISA section 3(15) (or a 
``member of the family'' as that term is defined in Code section 
4975(e)(6)). These provisions include spouses, ancestors, lineal 
descendants and spouses of a lineal descendant. Originally, the 
definition used in the exemption was more expansive, and, in addition 
to these entities also included ``a brother, a sister, or a spouse of a 
brother or a sister.'' A commenter stated that this definition was 
broader than the definition of ``relative'' in the other exemptions 
granted and amended today, and asked that the Department eliminate the 
references to brothers, sisters and their spouses. The Department 
concurs and has changed the text so that the definitions are consistent 
across exemptions.
    Section VI(d) defines ``Individual Retirement Account'' or ``IRA'' 
as any account or annuity described in Code section 4975(e)(1)(B) 
through (F), including, for example, an individual retirement account 
described in section 408(a) of the Code and an HSA described in section 
223(d) of the Code. This definition is unchanged from the proposal.
    The Department received comments on both the application of the 
proposed Regulation and the exemption proposals to other non-ERISA 
plans covered by Code section 4975, such as HSAs, Archer Medical 
Savings Accounts and Coverdell Education Savings Accounts. The 
Department notes that these accounts are given tax preferences as are 
IRAs. Further, some of the accounts, such as HSAs, can be used as long 
term savings accounts for retiree health care expenses. These types of 
accounts also are expressly defined by Code section 4975(e)(1) as plans 
that are subject to the Code's prohibited transaction rules. Thus, 
although they generally may hold fewer assets and may exist for shorter 
durations than IRAs, there is no statutory reason to treat them 
differently than other conflicted transactions and no basis for 
suspecting that the conflicts are any less influential with respect to 
advice on these arrangements. Accordingly, the Department does not 
agree with the commenters that the owners of these accounts are 
entitled to less protection than IRA investors. The Regulation 
continues to include advisers to these ``plans,'' and this exemption 
provides relief to them in the same manner as it does for individual 
retirement accounts described in section 408(a) of the Code.

 Grandfathering

    The Department received several comments from the industry 
requesting that the exemption include a grandfathering provision for 
pre-existing annuity contracts. The commenters stated that the 
grandfathering provision would help the industry avoid costly 
unraveling of ongoing client relationships. Many of the commenters 
requested that the grandfathering provision include coverage for 
transactions occurring after the Applicability Date of the exemption 
but based on advice that was given prior to the Applicability Date. The 
commenters argued that without a grandfathering provision existing 
relationships will become fiduciary relationships creating undue 
compliance burdens and costs that were not priced into the contracts 
and as a result many advisers may be forced to abandon existing IRA 
relationships.
    The Department has not included a grandfathering provision in this 
amended exemption, however some of the relief requested by commenters 
is available in the Best Interest Contract Exemption. Specifically, 
Section VII of the Best Interest Contract Exemption sets forth an 
exemption for investments that are pre-existing at the time of the 
Applicability Date and is available for pre-existing insurance and 
annuity contracts. Under Section VII of the Best Interest Contract 
Exemption, additional advice may be provided on existing investments 
after the Applicability Date, and additional compensation may be 
received, if the advice reflects the care, skill, prudence, and 
diligence under the circumstances then prevailing that a prudent person 
acting in a like capacity and familiar with such matters would use in 
the conduct of an enterprise of a like character and with like aims, 
based on the investment objectives, risk tolerance, financial 
circumstances, and needs of the retirement investor, and the advice is 
rendered without regard to the financial or other interests of the 
investment advice fiduciary or any affiliate or other party.
    The exemption set forth in Section VII of the Best Interest 
Contract Exemption is generally limited to securities or other property 
purchased prior to the Applicability Date, and does not generally 
extend to advice on additional contributions to an annuity purchased 
prior to the Applicability Date. Although commenters requested broader 
relief in this area, the Department has declined to permit advice on 
additional contributions to existing investments, without compliance 
with the conditions of this

[[Page 21171]]

exemption or the conditions of Section I of the Best Interest Contract 
Exemption. The primary purpose of the exemption for pre-existing 
investments in Section VII of the Best Interest Contract Exemption is 
to preserve compensation for services already rendered and to permit 
orderly transition from past arrangements, not to exempt future advice 
and investments from the important protections of the Regulation and 
this amended exemption or the Best Interest Contract Exemption. 
Permitting investment advice fiduciaries to recommend additional 
investments in an existing insurance or annuity contract, without the 
safeguards provided by the fiduciary norms in this amended exemption, 
would permit conflicts to flourish unchecked.

Applicability Date

    The Regulation will become effective June 7, 2016 and this amended 
exemption is issued on that same date. The Regulation is effective at 
the earliest possible effective date under the Congressional Review 
Act. For the exemption, the issuance date serves as the date on which 
the amended exemption is intended to take effect for purposes of the 
Congressional Review Act. This date was selected in order to provide 
certainty to plans, plan fiduciaries, plan participants and 
beneficiaries, IRAs, and IRA owners that the new protections afforded 
by the Regulation are officially part of the law and regulations 
governing their investment advice providers, and to inform financial 
services providers and other affected service providers that the 
Regulation and amended exemption are final and not subject to further 
amendment or modification without additional public notice and comment. 
The Department expects that this effective date will remove uncertainty 
as an obstacle to regulated firms allocating capital and other 
resources toward transition and longer term compliance adjustments to 
systems and business practices.
    The Department has also determined that, in light of the importance 
of the Regulation's consumer protections and the significance of the 
continuing monetary harm to retirement investors without the rule's 
changes, that an Applicability Date of April 10, 2017, is appropriate 
for plans and their affected financial services and other service 
providers to adjust to the basic change from non-fiduciary to fiduciary 
status. The amendment to and partial revocation of PTE 84-24, as 
finalized herein, can be relied on beginning on the Applicability Date. 
For the avoidance of doubt, no revocation will be applicable prior to 
the Applicability Date.

Paperwork Reduction Act Statement

    In accordance with the requirements of the Paperwork Reduction Act 
of 1995 (PRA) (44 U.S.C. 3506(c)(2)), the Department solicited comments 
on the information collections included in the proposed Amendment to 
and Partial Revocation of PTE 84-24 for Certain Transactions Involving 
Insurance Agents and Brokers, Pension Consultants, Insurance Companies, 
and Investment Company Principal Underwriters. 80 FR 22010 (Apr. 20, 
2015). The Department also submitted an information collection request 
(ICR) to OMB in accordance with 44 U.S.C. 3507(d), contemporaneously 
with the publication of the proposal, for OMB's review. The Department 
received two comments from one commenter that specifically addressed 
the paperwork burden analysis of the information collections. 
Additionally many comments were submitted, described elsewhere in this 
preamble and in the preamble to the accompanying final rule, which 
contained information relevant to the costs and administrative burdens 
attendant to the proposals. The Department took into account such 
public comments in connection with making changes to the prohibited 
transaction exemption, analyzing the economic impact of the proposals, 
and developing the revised paperwork burden analysis summarized below.
    In connection with publication of this final amendment to and 
partial revocation of PTE 84-24, the Department is submitting an ICR to 
OMB requesting approval of a new collection of information under a new 
OMB Control Number. The Department will notify the public when OMB 
approves the ICR.
    A copy of the ICR may be obtained by contacting the PRA addressee 
shown below or at http://www.RegInfo.gov. PRA ADDRESSEE: G. Christopher 
Cosby, Office of Policy and Research, U.S. Department of Labor, 
Employee Benefits Security Administration, 200 Constitution Avenue NW., 
Room N-5718, Washington, DC 20210. Telephone: (202) 693-8410; Fax: 
(202) 219-4745. These are not toll-free numbers.
    As discussed in detail below, PTE 84-24, as amended, provides an 
exemption for certain prohibited transactions that occur when 
investment advice fiduciaries and other service providers receive 
compensation for their recommendation that plans or IRAs purchase 
``Fixed Rate Annuity Contracts'' and insurance contracts. Relief is 
also provided for certain prohibited transactions that occur when 
investment advice fiduciaries and other service providers receive 
compensation as a result of recommendations that plans purchase 
securities in an investment company registered under the Investment 
Company Act of 1940. The amended exemption permits insurance agents, 
insurance brokers, pension consultants, and investment company 
principal underwriters that are parties in interest or fiduciaries with 
respect to plan investors to effect these purchases and receive a 
commission on them. The amended exemption is also available for the 
prohibited transaction that occurs when the insurance company selling 
the Fixed Rate Annuity Contract or insurance contract is a party in 
interest or disqualified person with respect to the plan or IRA. As 
amended, the exemption requires fiduciaries engaging in these 
transactions to adhere to certain Impartial Conduct Standards, 
including acting in the best interest of the plans and IRAs when 
providing advice.
    The amendment revises the disclosure and recordkeeping requirements 
of the exemption by requiring insurance agents and brokers, pension 
consultants, insurance companies, and investment company principal 
underwriters to make certain disclosures to and receive an advance 
authorization from plan fiduciaries or, as applicable, IRA owners, in 
order to receive relief from ERISA's and the Code's prohibited 
transaction rules for the receipt of compensation when plans and IRAs 
enter into certain recommended insurance and mutual fund transactions. 
The amendment will require insurance agents and brokers, pension 
consultants, insurance companies, and investment company principal 
underwriters relying on PTE 84-24 to maintain records necessary to 
demonstrate that the conditions of the exemption have been met. These 
requirements are ICRs subject to the PRA.
    The Department has made the following assumptions in order to 
establish a reasonable estimate of the paperwork burden associated with 
these ICRs:
     51.8 percent of disclosures to and advance authorizations 
from plans \66\

[[Page 21172]]

and 44.1 percent of disclosures to and advance authorizations from IRAs 
\67\ will be distributed electronically via means already used by 
respondents in the normal course of business, and the costs arising 
from electronic distribution will be negligible, while the remaining 
disclosures and advance authorizations will be distributed on paper and 
mailed at a cost of $0.05 per page for materials and $0.49 for First 
class Postage;
---------------------------------------------------------------------------

    \66\ According to data from the National Telecommunications and 
Information Administration (NTIA), 33.4 percent of individuals age 
25 and over have access to the Internet at work. According to a 
Greenwald & Associates survey, 84 percent of plan participants find 
it acceptable to make electronic delivery the default option, which 
is used as the proxy for the number of participants who will not opt 
out that are automatically enrolled (for a total of 28.1 percent 
receiving electronic disclosure at work). Additionally, the NTIA 
reports that 38.9 percent of individuals age 25 and over have access 
to the Internet outside of work. According to a Pew Research Center 
survey, 61 percent of Internet users use online banking, which is 
used as the proxy for the number of Internet users who will opt in 
for electronic disclosure (for a total of 23.7 percent receiving 
electronic disclosure outside of work). Combining the 28.1 percent 
who receive electronic disclosure at work with the 23.7 percent who 
receive electronic disclosure outside of work produces a total of 
51.8 percent who will receive electronic disclosure overall.
    \67\ According to data from the NTIA, 72.4 percent of 
individuals age 25 and older have access to the Internet. According 
to a Pew Research Center survey, 61 percent of Internet users use 
online banking, which is used as the proxy for the number of 
Internet users who will opt in for electronic disclosure. Combining 
these data produces an estimate of 44.1 percent of individuals who 
will receive electronic disclosures.
---------------------------------------------------------------------------

     Insurance agents and brokers, pension consultants, 
insurance companies, investment company principal underwriters, and 
plans will use existing in-house resources to prepare the legal 
authorizations and disclosures, and maintain the recordkeeping systems 
necessary to meet the requirements of the exemption;
     A combination of personnel will perform the tasks 
associated with the ICRs at an hourly wage rate of $167.32 for a 
financial manager, $55.21 for clerical personnel, and $133.61 for a 
legal professional; \68\
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    \68\ For a description of the Department's methodology for 
calculating wage rates, see http://www.dol.gov/ebsa/pdf/labor-cost-inputs-used-in-ebsa-opr-ria-and-pra-burden-calculations-march-2016.pdf. The Department's methodology for calculating the overhead 
cost input of its wage rates was adjusted from the proposed 
amendment to this PTE to the final amendment to this PTE. In the 
proposal, the Department based its overhead cost estimates on 
longstanding internal EBSA calculations for the cost of overhead. In 
response to a public comment stating that the overhead cost 
estimates were too low and without any supporting evidence, the 
Department incorporated published U.S. Census Bureau survey data on 
overhead costs into its wage rate estimates.
---------------------------------------------------------------------------

     Three percent of plans and three percent of IRAs will 
engage in covered transactions with insurance agents and brokers, 
pension consultants, and insurance companies annually;
     Approximately 1,500 insurance agents and brokers, pension 
consultants, and insurance companies will take advantage of this 
exemption with all of their client plans and IRAs; \69\ and
---------------------------------------------------------------------------

    \69\ According to 2013 Form 5500 data, 1,007 pension consultants 
service the retirement market. Additionally, SNL Financial data show 
that 398 life insurance companies reported receiving either 
individual or group annuity considerations in 2014. The Department 
has used these data as the count of insurance companies working in 
the ERISA-covered plan and IRA markets. The Department has rounded 
up to 1,500 to account for any other pension consultants or 
insurance companies that may not otherwise be accounted for.
---------------------------------------------------------------------------

     Ten investment company principal underwriters will take 
advantage of this exemption and each will do so once with one client 
plan annually.\70\
---------------------------------------------------------------------------

    \70\ In the Department's experience, investment company 
principal underwriters almost never use PTE 84-24. Therefore, the 
Department assumes that 10 investment company principal underwriters 
will engage in one transaction annually under PTE 84-24.
---------------------------------------------------------------------------

Disclosures and Consent Forms

    In order to receive commissions in conjunction with the purchase of 
insurance contracts or Fixed Rate Annuity Contracts, Section IV(b) of 
PTE 84-24 as amended requires the insurance agent or broker or pension 
consultant to obtain advance written authorization from a plan 
fiduciary independent of the insurance company (the independent 
fiduciary), or, in the case of an IRA, the IRA owner, following certain 
disclosures, including: If the agent, broker, or consultant is an 
Affiliate of the insurance company whose contract is being recommended, 
or if the ability of the agent, broker, or consultant to recommend 
insurance or Fixed Rate Annuity Contracts is limited by any agreement 
with the insurance company, the nature of the affiliation, limitation, 
or relationship; the insurance commission; and a statement of any 
charges, fees, discounts, penalties, or adjustments which may be 
imposed under the recommended contract in connection with the purchase, 
holding, exchange, termination, or sale of the contract.
    In order to receive commissions in conjunction with the purchase of 
securities issued by an investment company, Section IV(c) of PTE 84-24 
as amended requires the investment company principal underwriter to 
obtain approval from an independent plan fiduciary following certain 
disclosures: If the person recommending securities issued by an 
investment company is the principal underwriter of the investment 
company whose securities are being recommended, the nature of the 
relationship and of any limitation it places upon the principal 
underwriter's ability to recommend investment company securities; the 
Mutual Fund Commission; and a statement of any charges, fees, 
discounts, penalties, or adjustments which may be imposed under the 
recommended securities in connection with the purchase, holding, 
exchange, termination, or sale of the securities. Unless facts or 
circumstances would indicate the contrary, the approval required under 
Section IV(c) may be presumed if the independent plan fiduciary permits 
the transaction to proceed after receipt of the written disclosure.

Legal Costs

    According to 2013 Annual Return/Report of Employee Benefit (Form 
5500) data and IRS Statistics of Income data, the Department estimates 
that there are approximately 681,000 ERISA covered pension plans and 
approximately 54.4 million IRAs. Of these plans and IRAs, the 
Department assumes that, as stated previously, three percent of these 
plans and three percent of these IRAs will engage in transactions 
covered under PTE 84-24 annually with insurance agents or brokers and 
pension consultants. In the plan universe, the Department assumes that 
a legal professional will spend five hours per plan reviewing the 
disclosures and preparing an authorization form for each of the 
approximately 20,000 plans engaging in covered transactions each year. 
In the IRA universe, IRA holders are also required to provide an 
authorization, but the Department assumes that a legal professional 
working on behalf of each of the 1,500 insurance companies or pension 
consultants will spend three hours drafting a standard authorization 
form for IRA holders to sign and return. The Department also estimates 
that it will take two hours of legal time for each of the approximately 
1,500 insurance companies and pension consultants, and one hour of 
legal time for each of the 10 investment company principal 
underwriters, to produce the disclosures.\71\ This legal work results 
in a total of approximately 110,000 hours annually at an equivalent 
cost of $14.7 million.
---------------------------------------------------------------------------

    \71\ The Department assumes that it will require one hour of 
legal time per financial institution to prepare plan-oriented 
disclosures and one hour of legal time per financial institution to 
prepare IRA-oriented disclosures. Because insurance agents and 
pension consultants are permitted to use PTE 84-24 in their 
transactions with both plans and IRAs, this totals two hours of 
legal burden each. Because investment company principal underwriters 
are only permitted to use PTE 84-24 in their transactions with 
plans, this totals one hour of legal burden each.

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[[Page 21173]]

Production and Distribution of Required Disclosures

    The Department estimates that approximately 20,000 plans and 1.6 
million IRAs have engage in covered transactions with insurance agents 
or brokers and pension consultants under this exemption each year. The 
Department assumes that 10 plans engage in covered transactions with 
investment company principal underwriters under this exemption each 
year.
    The Department estimates that 20,000 plans will send insurance 
agents or brokers and pension consultants a two-page authorization 
letter and 1.6 million IRAs will receive a two-page authorization 
letter from insurance agents or brokers and pension consultants to sign 
and return each year. Prior to obtaining authorization, insurance 
companies and pension consultants will send the same 20,000 plans and 
1.6 million IRAs a seven-page pre-authorization disclosure. Paper 
copies of the authorization letter and the pre-authorization disclosure 
will be mailed for 48.2 percent of the plans and distributed 
electronically for the remaining 51.8 percent. Paper copies of the 
authorization letter and the pre-authorization disclosure will be 
mailed to 55.9 percent of the IRAs and distributed electronically to 
the remaining 44.1 percent. The Department estimates that electronic 
distribution will result in a de minimis cost, while paper distribution 
will cost approximately $1.3 million. Paper distribution of the letter 
and disclosure will also require two minutes of clerical preparation 
time \72\ resulting in a total of 62,000 hours at an equivalent cost of 
approximately $3.4 million.
---------------------------------------------------------------------------

    \72\ The Department has run experiments involving clerical staff 
suggesting that most notices can be printed and prepared for mailing 
in less than one minute per disclosure. Therefore, an estimate of 
two minutes per disclosure is a conservative estimate.
---------------------------------------------------------------------------

    The Department estimates that 10 plans will receive the seven-page 
pre-transaction disclosure from investment company principal 
underwriters; 51.8 percent will be distributed electronically and 48.2 
percent will be mailed. The Department estimates that electronic 
distribution will result in a de minimis cost, while the paper 
distribution will cost $4. Paper distribution will also require two 
minutes of clerical preparation time resulting in a total of 10 minutes 
at an equivalent cost of $9. Approval to investment company principal 
underwriters will be granted orally at de minimis cost.

Recordkeeping Requirement

    Section V of PTE 84-24, as amended, requires insurance agents and 
brokers, insurance companies, pension consultants, and investment 
company principal underwriters to maintain or cause to be maintained 
for six years and disclosed upon request the records necessary for the 
Department, IRS, plan fiduciary, contributing employer or employee 
organization whose members are covered by the plan, plan participant, 
beneficiary or IRA owner, to determine whether the conditions of this 
exemption have been met.
    The Department assumes that each institution will maintain these 
records in their normal course of business. Therefore, the Department 
has estimated that the additional time needed to maintain records 
consistent with the exemption will only require about one-half hour, on 
average, annually for a financial manager to organize and collate the 
documents or else draft a notice explaining that the information is 
exempt from disclosure, and an additional 15 minutes of clerical time 
to make the documents available for inspection during normal business 
hours or prepare the paper notice explaining that the information is 
exempt from disclosure. Thus, the Department estimates that a total of 
45 minutes of professional time (30 minutes of financial manager time 
and 15 minutes of clerical time) per financial institution per year 
would be required for a total hour burden of 1,000 hours at an 
equivalent cost of $147,000.
    In connection with the recordkeeping and disclosure requirements 
discussed above, Section V(b) (2) and (3) of PTE 84-24 provides that 
parties relying on the exemption do not have to disclose trade secrets 
or other confidential information to members of the public (i.e., plan 
fiduciaries, contributing employers or employee organizations whose 
members are covered by the plan, participants and beneficiaries and IRA 
owners), but that in the event a party refuses to disclose information 
on this basis, it must provide a written notice to the requester 
advising of the reasons for the refusal and advising that the 
Department may request such information. The Department's experience 
indicates that this provision is not commonly invoked, and therefore, 
the written notice is rarely, if ever, generated. Therefore, the 
Department believes the cost burden associated with this clause is de 
minimis. No other cost burden exists with respect to recordkeeping.

Overall Summary

    Overall, the Department estimates that in order to meet the 
conditions of this amended exemption, almost 22,000 financial 
institutions and plans will produce 3.3 million disclosures and notices 
annually. These disclosures and notices will result in over 172,000 
burden hours annually, at an equivalent cost of $18.2 million. This 
amended exemption will also result in a total annual cost burden of 
over $1.3 million.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection (Request for new OMB Control 
Number).
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Titles: (1) Amendment to and Partial Revocation of Prohibited 
Transaction Exemption (PTE) 84-24 for Certain Transactions Involving 
Insurance Agents and Brokers, Pension Consultants, Insurance Companies 
and Investment Company Principal Underwriters.
    OMB Control Number: 1210-NEW.
    Affected Public: Businesses or other for-profits; not for profit 
institutions.
    Estimated Number of Respondents: 21,940.
    Estimated Number of Annual Responses: 3,306,610.
    Frequency of Response: Initially, Annually, When engaging in 
exempted transaction.
    Estimated Total Annual Burden Hours: 172,301 hours.
    Estimated Total Annual Burden Cost: $1,319,353.

General Information

    The attention of interested persons is directed to the following:
    (1) The fact that a transaction is the subject of an exemption 
under ERISA section 408(a) and Code section 4975(c)(2) does not relieve 
a fiduciary or other party in interest or disqualified person with 
respect to a plan from certain other provisions of ERISA and the Code, 
including any prohibited transaction provisions to which the exemption 
does not apply and the general fiduciary responsibility provisions of 
ERISA section 404 which require, among other things, that a fiduciary 
discharge his or her duties respecting the plan solely in the interests 
of the plan's participants and beneficiaries and in a prudent fashion 
in accordance with ERISA section 404(a)(1)(B);
    (2) The Department finds that the class exemption as amended is 
administratively feasible, in the interests of the plan and of its

[[Page 21174]]

participants and beneficiaries and IRA owners, and protective of the 
rights of the plan's participants and beneficiaries and IRA owners;
    (3) The class exemption is applicable to a particular transaction 
only if the transaction satisfies the conditions specified in the class 
exemption; and
    (4) This amended class exemption is supplemental to, and not in 
derogation of, any other provisions of ERISA and the Code, including 
statutory or administrative exemptions and transitional rules. 
Furthermore, the fact that a transaction is subject to an 
administrative or statutory exemption is not dispositive of whether the 
transaction is in fact a prohibited transaction.

Amended Exemption

Section I. Covered Transactions

    (a) In general. ERISA and the Code prohibit fiduciary advisers to 
employee benefit plans and IRAs from self-dealing, including receiving 
compensation that varies based on their investment advice, and from 
receiving compensation from third parties in connection with their 
advice. ERISA and the Code also prohibit fiduciaries and other parties 
related to plans and IRAs from engaging in purchases and sales of 
products with the plans and IRAs. This exemption permits certain, 
specified persons, including specified persons who are fiduciaries due 
to their provision of investment advice to plans and IRAs, to receive 
these types of compensation in connection with transactions involving 
insurance contracts, specified annuity contracts, and investment 
company securities, as described below.
    (b) Exemptions. The restrictions of ERISA section 406(a)(1)(A) 
through (D) and 406(b) and the taxes imposed by Code section 4975(a) 
and (b) by reason of Code section 4975(c)(1)(A) through (F), do not 
apply to any of the following transactions if the conditions set forth 
in Sections II, III, IV, and V, as applicable, are met:
    (1) The receipt, directly or indirectly, by an insurance agent or 
broker or a pension consultant of an Insurance Commission and related 
employee benefits from an insurance company in connection with the 
purchase, with assets of a Plan or IRA, including through a rollover or 
distribution, of an insurance contract or a Fixed Rate Annuity 
Contract. A Fixed Rate Annuity Contract is a fixed annuity contract 
issued by an insurance company that is either an immediate annuity 
contract or a deferred annuity contract that (i) satisfies applicable 
state standard nonforfeiture laws at the time of issue, or (ii) in the 
case of a group fixed annuity, guarantees return of principal net of 
reasonable compensation and provides a guaranteed declared minimum 
interest rate in accordance with the rates specified in the standard 
nonforfeiture laws in that state that are applicable to individual 
annuities; in either case, the benefits of which do not vary, in part 
or in whole, based on the investment experience of a separate account 
or accounts maintained by the insurer or the investment experience of 
an index or investment model. A Fixed Rate Annuity Contract does not 
include a variable annuity or an indexed annuity or similar annuity.
    (2) The receipt of a Mutual Fund Commission by a Principal 
Underwriter for an investment company registered under the Investment 
Company Act of 1940 (an investment company) in connection with the 
purchase, with Plan assets, including through a rollover or 
distribution, of securities issued by an investment company.
    (3)(i) The effecting by an insurance agent or broker, or pension 
consultant of a transaction for the purchase, with assets of a Plan or 
IRA, including through a rollover or distribution, of a Fixed Rate 
Annuity Contract or insurance contract, or (ii) the effecting by a 
Principal Underwriter of a transaction for the purchase, with assets of 
a Plan, including through a rollover or distribution, of securities 
issued by an investment company.
    (4) The purchase, with assets of a Plan or IRA, including through a 
rollover or distribution, of a Fixed Rate Annuity Contract or insurance 
contract from an insurance company, and the receipt of compensation or 
other consideration by the insurance company.
    (5) The purchase, with assets of a Plan, of a Fixed Rate Annuity 
Contract or insurance contract from an insurance company which is a 
fiduciary or a service provider (or both) with respect to the Plan 
solely by reason of the sponsorship of a Master or Prototype Plan.
    (6) The purchase, with assets of a Plan, of securities issued by an 
investment company from, or the sale of such securities to, an 
investment company or an investment company Principal Underwriter, when 
the investment company, Principal Underwriter, or the investment 
company investment adviser, is a fiduciary or a service provider (or 
both) with respect to the Plan solely by reason of: (A) The sponsorship 
of a Master or Prototype Plan; or (B) the provision of Nondiscretionary 
Trust Services to the Plan; or (C) both (A) and (B).
    (c) Scope of these Exemptions.
    (1) The exemptions set forth in Section I(b) do not apply to the 
purchase by a Plan or IRA, each as defined in Section VI, of a variable 
annuity contract, indexed annuity contract, or similar contract; and
    (2) The exemptions set forth in Section I(b) do not apply to the 
purchase by an IRA of investment company securities.

Section II. Impartial Conduct Standards

    If the insurance agent or broker, pension consultant, insurance 
company or investment company Principal Underwriter is a fiduciary 
within the meaning of ERISA section 3(21)(A)(ii) or Code section 
4975(e)(3)(B) with respect to the assets involved in the transaction, 
the following conditions must be satisfied with respect to the 
transaction to the extent they are applicable to the fiduciary's 
actions:
    (a) When exercising fiduciary authority described in ERISA section 
3(21)(A)(ii) or Code section 4975(e)(3)(B) with respect to the assets 
involved in the transaction, the insurance agent or broker, pension 
consultant, insurance company or investment company Principal 
Underwriter acts in the Best Interest of the Plan or IRA at the time of 
the transaction; and
    (b) The statements by the insurance agent or broker, pension 
consultant, insurance company or investment company Principal 
Underwriter about recommended investments, fees, Material Conflicts of 
Interest, and any other matters relevant to a Plan's or IRA owner's 
investment decisions, are not materially misleading at the time they 
are made. For this purpose, the insurance agent's or broker's, pension 
consultant's, insurance company's or investment company Principal 
Underwriter's failure to disclose a Material Conflict of Interest 
relevant to the services it is providing or other actions it is taking 
in relation to a Plan's or IRA owner's investment decisions is 
considered a misleading statement.

Section III. General Conditions

    (a) The transaction is effected by the insurance agent or broker, 
pension consultant, insurance company or investment company Principal 
Underwriter in the ordinary course of its business as such a person.
    (b) The transaction is on terms at least as favorable to the Plan 
or IRA as an arm's length transaction with an unrelated party would be.
    (c) The combined total of all fees and compensation received by the 
insurance agent or broker, pension consultant,

[[Page 21175]]

insurance company or investment company Principal Underwriter for their 
services does not exceed reasonable compensation within the meaning of 
ERISA section 408(b)(2) and Code section 4975(d)(2),

Section IV. Conditions for Transactions Described in Section I(b)(1) 
Through (4)

    The following conditions apply solely to a transaction described in 
paragraphs (b)(1), (2), (3) or (4) of Section I:
    (a) The insurance agent or broker, pension consultant, insurance 
company, or investment company Principal Underwriter is not (1) a 
trustee of the Plan or IRA (other than a Nondiscretionary Trustee who 
does not render investment advice with respect to any assets of the 
Plan), (2) a plan administrator (within the meaning of ERISA section 
3(16)(A) and Code section 414(g)), (3) a fiduciary who is expressly 
authorized in writing to manage, acquire, or dispose of the assets of 
the Plan or IRA on a discretionary basis, or (4) an employer any of 
whose employees are covered by the Plan. Notwithstanding the above, an 
insurance agent or broker, pension consultant, insurance company, or 
investment company Principal Underwriter that is Affiliated with a 
trustee or an investment manager (within the meaning of Section VI(e)) 
with respect to a Plan or IRA may engage in a transaction described in 
Section I(b)(1)-(4) of this exemption (if permitted under Section I(b)) 
on behalf of the Plan or IRA if the trustee or investment manager has 
no discretionary authority or control over the Plan's or IRA's assets 
involved in the transaction other than as a Nondiscretionary Trustee.
    (b)(1) With respect to a transaction involving the purchase with 
Plan or IRA assets of a Fixed Rate Annuity Contract or insurance 
contract, or the receipt of an Insurance Commission thereon, the 
insurance agent or broker or pension consultant provides to an 
independent fiduciary with respect to the Plan, or in the case of an 
IRA, to the IRA owner, prior to the execution of the transaction the 
following information in writing and in a form calculated to be 
understood by a plan fiduciary or IRA owner who has no special 
expertise in insurance or investment matters:
    (A) If the agent, broker, or consultant is an Affiliate of the 
insurance company whose contract is being recommended, or if the 
ability of the agent, broker, or consultant to recommend Fixed Rate 
Annuity Contracts or insurance contracts is limited by any agreement 
with the insurance company, the nature of the affiliation, limitation, 
or relationship;
    (B) The Insurance Commission, expressed to the extent feasible as 
an absolute dollar figure, or otherwise, as a percentage of gross 
annual premium payments, asset accumulation value, or contract value, 
for the first year and for each of the succeeding renewal years, that 
will be paid directly or indirectly by the insurance company to the 
agent, broker, or consultant in connection with the purchase of the 
recommended contract, including, if applicable, separate identification 
of the amount of the Insurance Commission that will be paid to any 
other person as a gross dealer concession, override, or similar 
payment; and
    (C) A statement of any charges, fees, discounts, penalties or 
adjustments which may be imposed under the recommended contract in 
connection with the purchase, holding, exchange, termination, or sale 
of the contract.
    (2) Following the receipt of the information required to be 
disclosed in paragraph (b)(1), and prior to the execution of the 
transaction, the fiduciary or IRA owner acknowledges in writing receipt 
of the information and approves the transaction on behalf of the Plan 
or IRA. The fiduciary may be an employer of employees covered by the 
Plan but may not be an insurance agent or broker, pension consultant, 
or insurance company involved in the transaction (i.e., an independent 
fiduciary). The independent fiduciary may not receive, directly or 
indirectly (e.g., through an Affiliate), any compensation or other 
consideration for his or her own personal account from any party 
dealing with the Plan in connection with the transaction.
    (c)(1) With respect to a transaction involving the purchase with 
plan assets of securities issued by an investment company or the 
receipt of a Mutual Fund Commission thereon by an investment company 
Principal Underwriter, the investment company Principal Underwriter 
provides to an independent fiduciary with respect to the Plan, prior to 
the execution of the transaction, the following information in writing 
and in a form calculated to be understood by a plan fiduciary who has 
no special expertise in insurance or investment matters:
    (A) If the person recommending securities issued by an investment 
company is the Principal Underwriter of the investment company whose 
securities are being recommended, the nature of the relationship and of 
any limitation it places upon the Principal Underwriter's ability to 
recommend investment company securities;
    (B) The Mutual Fund Commission, expressed to the extent feasible, 
as an absolute dollar figure, or otherwise, as a percentage of the 
dollar amount of the Plan's gross payment and of the amount actually 
invested, that will be received by the Principal Underwriter in 
connection with the purchase of the recommended securities issued by 
the investment company; and
    (C) A statement of any charges, fees, discounts, penalties, or 
adjustments which may be imposed under the recommended securities in 
connection with the purchase, holding, exchange, termination, or sale 
of the securities.
    (2) Following the receipt of the information required to be 
disclosed in paragraph (c)(1), and prior to the execution of the 
transaction, the independent fiduciary approves the transaction on 
behalf of the Plan. Unless facts or circumstances would indicate the 
contrary, the approval may be presumed if the fiduciary permits the 
transaction to proceed after receipt of the written disclosure. The 
fiduciary may be an employer of employees covered by the Plan, but may 
not be a Principal Underwriter involved in the transaction. The 
independent fiduciary may not receive, directly or indirectly (e.g., 
through an Affiliate), any compensation or other consideration for his 
or her own personal account from any party dealing with the Plan in 
connection with the transaction.
    (d) With respect to additional recommendations regarding purchases 
of Fixed Rate Annuity Contracts, insurance contract, or securities 
issued by an investment company, the written disclosure required under 
paragraphs (b) and (c) of this Section IV need not be repeated, unless:
    (1) More than one year has passed since the disclosure was made 
with respect to the purchase of the same kind of contract or security, 
or
    (2) The contract or security being recommended for purchase or the 
Insurance Commission or Mutual Fund Commission with respect thereto is 
materially different from that for which the approval described in 
paragraphs (b) and (c) of this Section was obtained.

Section V. Recordkeeping Requirements

    (a) The insurance agent or broker, pension consultant, insurance 
company or investment company Principal Underwriter engaging in the 
covered transactions maintains or causes to be maintained for a period 
of six years, in a manner that is reasonably accessible for audit and 
examination, the records necessary to enable the persons described in 
Section V(b) to determine

[[Page 21176]]

whether the conditions of this exemption have been met, except that:
    (1) If the records necessary to enable the persons described in 
Section V(b) below to determine whether the conditions of the exemption 
have been met are lost or destroyed, due to circumstances beyond the 
control of the insurance agent or broker, pension consultant, insurance 
company, or investment company Principal Underwriter, then no 
prohibited transaction will be considered to have occurred solely on 
the basis of the unavailability of those records; and
    (2) No party in interest, other than the insurance agent or broker, 
pension consultant, insurance company or investment company Principal 
Underwriter shall be subject to the civil penalty that may be assessed 
under ERISA section 502(i) or the taxes imposed by Code section 4975(a) 
and (b) if the records are not maintained or are not available for 
examination as required by paragraph (b) below; and
    (b)(1) Except as provided below in subparagraph (2) or as precluded 
by 12 U.S.C. 484, and notwithstanding any provisions of ERISA section 
504(a)(2) and (b), the records referred to in the above paragraph are 
reasonably available at their customary location for examination during 
normal business hours by--
    (A) Any duly authorized employee or representative of the 
Department or the IRS;
    (B) Any fiduciary of the Plan or any duly authorized employee or 
representative of the fiduciary;
    (C) Any contributing employer and any employee organization whose 
members are covered by the Plan, or any authorized employee or 
representative of these entities; or
    (D) Any participant or beneficiary of the Plan or the duly 
authorized representative of the participant or beneficiary or IRA 
owner; and
    (2) None of the persons described in subparagraph (1)(B)-(D) above 
shall be authorized to examine records regarding a transaction 
involving a Plan or IRA unrelated to the person, or trade secrets or 
commercial or financial information of the insurance agent or broker, 
pension consultant, insurance company or investment company Principal 
Underwriter which is privileged or confidential.
    (3) Should the insurance agent or broker, pension consultant, 
insurance company or investment company Principal Underwriter refuse to 
disclose information on the basis that the information is exempt from 
disclosure, the insurance agent or broker, pension consultant, 
insurance company or investment company Principal Underwriter shall, by 
the close of the thirtieth (30th) day following the request, provide a 
written notice advising that person of the reasons for the refusal and 
that the Department may request the information.
    (c) Failure to maintain the required records necessary to determine 
whether the conditions of this exemption have been met will result in 
the loss of the exemption only for the transaction or transactions for 
which records are missing or have not been maintained. It does not 
affect the relief for other transactions.

Section VI. Definitions

    For purposes of this exemption:
    (a) The term ``Affiliate'' of a person means:
    (1) Any person directly or indirectly controlling, controlled by, 
or under common control with the person;
    (2) Any officer, director, employee (including, in the case of 
Principal Underwriter, any registered representative thereof, whether 
or not the person is a common law employee of the Principal 
Underwriter), or relative of any such person, or any partner in such 
person; or
    (3) Any corporation or partnership of which the person is an 
officer, director, or employee, or in which the person is a partner.
    (b) The insurance agent or broker, pension consultant, insurance 
company or investment company Principal Underwriter that is a fiduciary 
acts in the ``Best Interest'' of the Plan or IRA when the fiduciary 
acts with the care, skill, prudence, and diligence under the 
circumstances then prevailing that a prudent person acting in a like 
capacity and familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims, based on the 
investment objectives, risk tolerance, financial circumstances and 
needs of the Plan or IRA, without regard to the financial or other 
interests of the fiduciary, any affiliate or other party.
    (c) The term ``control'' means the power to exercise a controlling 
influence over the management or policies of a person other than an 
individual.
    (d) The terms ``Individual Retirement Account'' or ``IRA'' mean any 
account or annuity described in Code section 4975(e)(1)(B) through (F), 
including, for example, an individual retirement account described in 
section 408(a) of the Code and an HSA described in section 223(d) of 
the Code.
    (e) The terms ``insurance agent or broker,'' ``pension 
consultant,'' ``insurance company,'' ``investment company,'' and 
``Principal Underwriter'' mean such persons and any Affiliates thereof.
    (f) The term ``Insurance Commission'' mean a sales commission paid 
by the insurance company to the insurance agent or broker or pension 
consultant for the service of effecting the purchase of a Fixed Rate 
Annuity Contract or insurance contract, including renewal fees and 
trailers, but not revenue sharing payments, administrative fees, or 
marketing payments.
    (g) The term ``Master or Prototype Plan'' means a Plan which is 
approved by the Service under Rev. Proc. 2011-49, 2011-44 I.R.B. 608 
(10/31/2011), as modified, or its successors.
    (h) A ``Material Conflict of Interest'' exists when a person has a 
financial interest that a reasonable person would conclude could affect 
the exercise of its best judgment as a fiduciary in rendering advice to 
a Plan or IRA.
    (i) The term ``Mutual Fund Commission'' means a commission or sales 
load paid either by the Plan or the investment company for the service 
of effecting or executing the purchase of investment company 
securities, but does not include a 12b-1 fee, revenue sharing payment, 
administrative fee, or marketing fee.
    (j) The term ``Nondiscretionary Trust Services'' means custodial 
services, services ancillary to custodial services, none of which 
services are discretionary, duties imposed by any provisions of the 
Code, and services performed pursuant to directions in accordance with 
ERISA section 403(a)(1). The term ``Nondiscretionary Trustee'' of a 
Plan or IRA means a trustee whose powers and duties with respect to the 
Plan are limited to the provision of Nondiscretionary Trust Services. 
For purposes of this exemption, a person who is otherwise a 
Nondiscretionary Trustee will not fail to be a Nondiscretionary Trustee 
solely by reason of his having been delegated, by the sponsor of a 
Master or Prototype Plan, the power to amend the Plan.
    (k) The term ``Fixed Rate Annuity Contract'' means a fixed annuity 
contract issued by an insurance company that is either an immediate 
annuity contract or a deferred annuity contract that (i) satisfies 
applicable state standard nonforfeiture laws at the time of issue, or 
(ii) in the case of a group fixed annuity, guarantees return of 
principal net of reasonable compensation and provides a guaranteed 
declared minimum interest rate in accordance with the rates specified 
in the standard nonforfeiture laws in that state that are applicable to 
individual annuities; in either case, the

[[Page 21177]]

benefits of which do not vary, in part or in whole, based on the 
investment experience of a separate account or accounts maintained by 
the insurer or the investment experience of an index or investment 
model. A Fixed Rate Annuity Contract does not include a variable 
annuity or an indexed annuity or similar annuity.
    (l) The term ``Plan'' means any employee benefit plan described in 
section 3(3) of the Act and any plan described in section 4975(e)(1)(A) 
of the Code.
    (m) The term ``Principal Underwriter'' is defined in the same 
manner as that term is defined in section 2(a)(29) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-2(a)(29)).
    (n) The term ``relative'' means a ``relative'' as that term is 
defined in ERISA section 3(15) (or a ``member of the family'' as that 
term is defined in Code section 4975(e)(6)).

    Signed at Washington, DC, this 1st day of April, 2016.
Phyllis C. Borzi,
Assistant Secretary, Employee Benefits Security Administration, 
Department of Labor.
 BILLING CODE 4510-29-P

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[FR Doc. 2016-07928 Filed 4-6-16; 11:15 am]
 BILLING CODE 4510-29-C