What is the prohibited transaction exemption 84-24 (PTE 84-24)?
Prohibited Transaction Exemption 84-24
Application of Exemption
The fiduciary rule amended the requirements of the existing PTE 84-24. PTE 84-24 is a class exemption permitting certain fiduciary advisors (such as insurance agents, brokers and pension consultants) and certain other service providers to receive compensation, including variable compensation and commissions, in connection with transactions with plans and IRAs involving insurance contracts, fixed-rate annuities, and investment company securities.
The amendments narrow the scope of relief to exclude variable and indexed annuities (these must use the Best Interest Contract Exemption), to require new and more detailed disclosures, and to more narrowly define commission to exclude revenue sharing, administrative and marketing payments. While PTE 84-24 allows traditional, variable insurance commissions to be paid in connection with these limited products, it does not apply to non-commission compensation (such as separate awards for production targets), requires disclosure by dollar amount where feasible, and imposes the fiduciary Best Interest standard of care.
Transactions covered by 84-24:
- Receipt of an “Insurance Commission” and related employee benefits by an insurance agent, broker or pension consultant from an insurance company in connection with the purchase (with assets of a plan or IRA, including through rollover or distribution) of an insurance contract or “Fixed Rate Annuity Contract”;
- Receipt of a “Mutual Fund Commission” by a principal underwriter for an investment company in connection with the purchase (with assets of a plan or IRA, including through rollover or distribution) of securities issued by an investment company;
- The effecting of such transactions by an insurance agent, broker or pension consultant, or by a principal underwriter;
- The purchase of a Fixed Rate Annuity Contract or insurance contract with plan or IRA assets from an insurance company and the receipt of compensation by the insurance company;
- The purchase of a Fixed Rate Annuity Contract or insurance contract with plan assets from an insurance company that is a fiduciary or service provider to the plan solely by reason of the sponsorship of a Mater or Prototype Plan; or
- The purchase of securities issued by an investment company with plan assets or the sale of such securities to an investment company or investment company principal underwriter, when the investment company, its advisor, or principal underwriter is a fiduciary or service provider to the plan solely by reason of sponsoring a Mater or Prototype Plan, or by providing Nondiscretionary Trust services.
Amended Scope of Exemption:
The exemption does not apply to:
- The purchase by a plan or IRA of a variable annuity contract, an indexed annuity contract, or similar contract,
- Transactions where the agent, broker, consultant or underwriter is:
- A trustee of the plan or IRA (unless a nondiscretionary trustee who does not render investment advice),
- A 3(16) plan administrator,
- A discretionary investment fiduciary of the plan, or
- An employer of employees covered by the plan; OR
- The purchase by an IRA of investment company securities.
- An “Insurance Commission” is a sales commission paid by the insurance company (including through an intermediary) to the insurance agent, 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.
- A “Mutual Fund Commission” is 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.
- A “Fixed Rate Annuity Contract” is a fixed annuity contract issued by an insurance company that is either immediate or deferred and that satisfies applicable state standard non-forfeiture laws; or in the case of a group fixed annuity, guarantees return of principal net of reasonable compensation. In either case, the benefits do not vary based on the investment experience of a separate account, index or investment model. It does NOT include a variable annuity, indexed annuity or similar annuity.
The recordkeeping requirements detailed in the summary of the BIC Exemption are also applicable under PTE 84-24, but no notice to EBSA of an intention to rely on PTE 84-24 is required.
Conditions of Exemption
To rely on PTE 84-24, the insurance agent, broker, pension consultant, or principal underwriter must meet the following conditions:
- Adhere to impartial conduct standards requiring them to:
- Give advice that is in the retirement investor’s best interest (i.e., prudent advice that is based on the investment objectives, risk tolerance, financial circumstances, and needs of the retirement investor, without regard to financial or other interests of the financial advisor, financial institution or any affiliates or other parties) AND
- Make no misleading statements about investment transactions, compensation, and conflicts of interest.
- The transaction is effected in the ordinary course of business for the agent, broker, consultant or underwriter.
- The terms of the transaction are at least as favorable to the plan or IRA as an arm’s length transaction with an unrelated party would be.
- The combined total of all fees and compensation received by the agent, broker, consultant, insurance company or investment company underwriter does not exceed reasonable compensation.
- The plan fiduciary or IRA must receive, prior to the transaction, written disclosure explaining:
- The nature of any affiliation with the recommended insurance or investment company, or any agreements limiting the advisor’s recommendation,
- To the extent feasible, the actual dollar amount (if not feasible, as a percentage of the gross annual premium, asset accumulation value or contract value) of the insurance commission for the first year and for each renewal year paid directly or indirectly to the agent, broker or consultant, INCLUDING separate identification of the amount paid to any other person as a gross dealer concession, override or similar payment, and
- A statement of any charges, fees, discounts, penalties, or adjustments which may be imposed in connection with the purchase, holding, exchange, termination or sale of the contract or securities.
- Following disclosure and prior to execution of the contract, the independent fiduciary or IRA owner must, in writing, acknowledge receipt of the information and approve the transaction.
PTE 84-24 during the Transition Period (6/9/17 - 12/31/17)
During the Transition period from 6/9/17 through 12/31/17, many of the changes discussed above do not apply. Transition PTE 84-24 reverts back to the pre-Fiduciary Rule version of the exemption, except for the addition of the Impartial Conduct Standards (described below). Thus, the narrowed definition of insurance commission does not apply, and the exemption applies to recommendations of all types of annuities throughout 2017, including fixed-rate, fixed indexed and variable annuities.
In addition to the disclosure and other requirements that have been part of PTE 84-24 for many years, the advisor must meet the Impartial Conduct Standards:
• A recommendation in the Best Interest of the recipient—this means a thorough, prudent and well-documented recommendation that is the result of a fiduciary process taking into account all relevant factors;
• No more than reasonable compensation; and
• No materially misleading statements at the time the recommendation is made. While the text of PTE 84-24 notes that a failure to disclose a material conflict of interest may constitute a materially misleading statement, the disclosures already required by the exemption and other laws would appear to address items that would suggest a material conflict (fees received, affiliations or agreements with the insurance carrier, etc.). The Department has not identified any examples of material conflicts not already disclosed.