[Federal Register Volume 82, Number 12 (Thursday, January 19, 2017)]
[Proposed Rules]
[Pages 7336-7374]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-01316]



[[Page 7335]]

Vol. 82

Thursday,

No. 12

January 19, 2017

Part XI





 Department of Labor





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 Employee Benefits Security Administration





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29 CFR Part 2550





 Proposed Best Interest Contract Exemption for Insurance 
Intermediaries; Proposed Rule

  Federal Register / Vol. 82 , No. 12 / Thursday, January 19, 2017 / 
Proposed Rules  

[[Page 7336]]


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DEPARTMENT OF LABOR

Employee Benefits Security Administration

29 CFR Part 2550

[Application No. D-11926]
ZRIN 1210-ZA26


Proposed Best Interest Contract Exemption for Insurance 
Intermediaries

AGENCY: Employee Benefits Security Administration, U.S. Department of 
Labor.

ACTION: Notification of Proposed Class exemption.

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SUMMARY: This document contains a notice of pendency before the 
Department of Labor of a proposed class exemption from certain 
prohibited transaction restrictions of the Employee Retirement Income 
Security Act of 1974, as amended (ERISA), and the Internal Revenue Code 
of 1986, as amended (the Code). The provisions at issue generally 
prohibit fiduciaries with respect to employee benefit plans and 
individual retirement accounts (IRAs) from engaging in self-dealing and 
receiving compensation from third parties in connection with 
transactions involving the plans and IRAs. The exemption proposed in 
this document, if granted, would allow certain insurance 
intermediaries, and the insurance agents and insurance companies they 
contract with, to receive compensation in connection with fixed annuity 
transactions that may otherwise give rise to prohibited transactions as 
a result of the provision of investment advice to plan participants and 
beneficiaries, IRA owners and certain plan fiduciaries (including small 
plan sponsors). The proposed exemption includes protective conditions 
to safeguard the interests of the plans, participants and beneficiaries 
and IRA owners and is similar to the Department's Best Interest 
Contract Exemption (PTE 2016-01) granted on April 8, 2016, at 81 FR 
21002, as corrected at 81 FR 44773 (July 11, 2016).

DATES: Comments: Written comments and requests for a public hearing on 
the proposed exemption must be submitted to the Department within 30 
days from the date of publication of this Federal Register document. 
Applicability: The Department proposes to make this exemption available 
on April 10, 2017. Transition relief is proposed for the period from 
April 10, 2017, through August 15, 2018; see ``Transition Relief,'' 
below.

ADDRESSES: All written comments and requests for a hearing concerning 
the proposed class exemption should be sent to the Office of Exemption 
Determinations by any of the following methods, identified by ZRIN 
1210-ZA26:
    Federal eRulemaking Portal: http://www.regulations.gov at Docket ID 
number: EBSA-2016-0026. Follow the instructions for submitting 
comments.
    Email to: [email protected].
    Fax to: (202) 693-8474.
    Mail: Office of Exemption Determinations, Employee Benefits 
Security Administration, (Attention: D-11926), U.S. Department of 
Labor, 200 Constitution Avenue NW., Suite 400, Washington, DC 20210.
    Hand Delivery/Courier: Office of Exemption Determinations, Employee 
Benefits Security Administration, (Attention: D-11926), U.S. Department 
of Labor, 122 C St. NW., Suite 400, Washington, DC 20001.
    Instructions: All comments and requests for a hearing must be 
received by the end of the comment period. Requests for a hearing must 
state the issues to be addressed and include a general description of 
the evidence to be presented at the hearing. The comments and hearing 
requests will be available for public inspection in the Public 
Disclosure Room of the Employee Benefits Security Administration, U.S. 
Department of Labor, Room N-1513, 200 Constitution Avenue NW., 
Washington, DC 20210. Comments and hearing requests will also be 
available online at www.regulations.gov, at Docket ID number: EBSA-
2016-0026 and www.dol.gov/ebsa, at no charge.
    Warning: All comments and hearing requests will be made available 
to the public. Do not include any personally identifiable information 
(such as Social Security number, name, address, or other contact 
information) or confidential business information that you do not want 
publicly disclosed. All comments and hearing requests may be posted on 
the Internet and can be retrieved by most Internet search engines.

FOR FURTHER INFORMATION CONTACT: Brian Shiker or Erin Hesse, telephone 
(202) 693-8540, Office of Exemption Determinations, Employee Benefits 
Security Administration, U.S. Department of Labor (this is not a toll-
free number).

SUPPLEMENTARY INFORMATION: The Department is proposing this class 
exemption on its own motion pursuant to ERISA section 408(a) and Code 
section 4975(c)(2), and in accordance with procedures set forth in 29 
CFR part 2570, subpart B (76 FR 66637, 66644, October 27, 2011). 
Effective December 31, 1978, section 102 of Reorganization Plan No. 4 
of 1978, 5 U.S.C. App. 1 (1996), transferred the authority of the 
Secretary of the Treasury to issue exemptions of the type proposed by 
the Secretary of Labor.

Executive Summary

Purpose of Regulatory Action

    The Department is proposing this exemption in connection with its 
regulation under ERISA section 3(21)(A)(ii) and Code section 
4975(e)(3)(B) (Regulation), published in the Federal Register on April 
8, 2016, and effective on April 10, 2017.\1\ The Regulation defines 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. The Regulation also applies to the definition of a 
``fiduciary'' of a plan (including an IRA) under the Code. The 
Regulation amended 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 1975 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 treated as 
fiduciary in nature and those that should not.
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    \1\ See Definition of the Term ``Fiduciary''; Conflict of 
Interest Rule--Retirement Investment Advice, 81 FR 20946.
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    In conjunction with the Regulation, the Department granted 
Prohibited Transaction Exemption (PTE) 2016-01 (the Best Interest 
Contract Exemption), also on April 8, 2016, and corrected on July 11, 
2016. The Best Interest Contract Exemption is designed to promote the 
provision of investment advice that is in the best interest of retail 
investors such as plan participants and beneficiaries, IRA owners, and 
certain plan fiduciaries, including small plan sponsors (Retirement 
Investors). ERISA and the Code generally prohibit fiduciaries from 
receiving payments from third parties and from acting on conflicts of 
interest, including using their authority to affect or increase their

[[Page 7337]]

own compensation, in connection with transactions involving a plan or 
IRA. Certain types of fees and compensation common in the retail 
market, such as brokerage or insurance commissions, 12b-1 fees and 
revenue sharing payments, may fall within these prohibitions when 
received by fiduciaries as a result of transactions involving advice to 
the plan, plan participants and beneficiaries, and IRA owners.
    To facilitate continued provision of advice to Retirement Investors 
under conditions designed to safeguard the interests of these 
investors, the Best Interest Contract Exemption allows certain 
investment advice fiduciaries (Financial Institutions and Advisers) to 
receive various forms of compensation that, in the absence of an 
exemption, would not be permitted under ERISA and the Code. ``Financial 
Institutions,'' defined in the exemption to include banks, investment 
advisers registered under the Investment Advisers Act of 1940 or state 
law, broker-dealers, and insurance companies, and individual 
``Advisers'' must adhere to basic standards of impartial conduct 
(Impartial Conduct Standards), namely, giving prudent advice that is in 
the customer's best interest, avoiding misleading statements, and 
receiving no more than reasonable compensation. Additionally, Financial 
Institutions must exercise supervisory authority over Advisers by 
adopting anti-conflict policies and procedures and insulating the 
Advisers from incentives to violate the exemption's Impartial Conduct 
Standards.
    The class exemption proposed in this document would provide relief 
that is similar to the Best Interest Contract Exemption for certain 
insurance intermediaries that commit to act as Financial Institutions. 
Insurance intermediaries typically recruit, train and support 
independent insurance agents and market and distribute insurance 
products such as traditional fixed rate annuities and fixed indexed 
annuities. The intermediaries include organizations commonly referred 
to as independent marketing organizations (IMOs), field marketing 
organizations (FMOs) and brokerage general agencies (BGAs). The 
exemption would apply to recommendations of ``Fixed Annuity 
Contracts,'' which are generally defined as fixed rate annuities and 
fixed indexed annuities. If the conditions of the exemption are 
satisfied, insurance intermediaries that satisfy the definition of 
``Financial Institution,'' as well as the insurance agents and 
insurance companies that they contract with, would be permitted to 
receive compensation and other consideration as a result of the 
provision of investment advice to Retirement Investors in connection 
with transactions involving these annuities.
    ERISA section 408(a) specifically authorizes the Secretary of Labor 
to grant 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. Before 
granting an exemption, the Department must find that the 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. 
Interested parties are permitted to submit comments to the Department 
through February 21, 2017.
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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)) (the 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. To rationalize the administration and 
interpretation of dual provisions under ERISA and the Code, the 
Reorganization Plan divided the interpretive and rulemaking 
authority for these provisions between the Secretaries of Labor and 
of the Treasury, so that, in general, the agency with responsibility 
for a given provision of Title I of ERISA would also have 
responsibility for the corresponding provision in the Code. Among 
the sections transferred to the Department were the prohibited 
transaction provisions and the definition of a fiduciary in both 
Title I of ERISA and in the Code. ERISA's prohibited transaction 
rules, 29 U.S.C. 1106-1108, apply to ERISA-covered plans, and the 
Code's corresponding prohibited transaction rules, 26 U.S.C. 
4975(c), apply both to ERISA-covered pension plans that are tax-
qualified pension plans, as well as other tax-advantaged 
arrangements, such as IRAs, that are not subject to the fiduciary 
responsibility and prohibited transaction rules in ERISA. 
Specifically, section 102(a) of the Reorganization Plan provides the 
Department of Labor 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 exemption would provide relief from 
the indicated prohibited transaction provisions of both ERISA and 
the Code.
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Summary of the Major Provisions

    The proposed exemption would be available for insurance 
intermediaries satisfying the definition of ``Financial Institution,'' 
and insurance agents (Advisers) and insurance companies with whom they 
contract, as well as their affiliates and related entities (as defined 
in the proposal), when they make investment recommendations regarding 
Fixed Annuity Contracts to retail ``Retirement Investors.'' Retirement 
Investors are plan participants and beneficiaries, IRA \3\ owners, and 
non-institutional (or ``retail'') fiduciaries. As a condition of 
receiving compensation that would otherwise be prohibited under ERISA 
and the Code, the exemption would require the Financial Institutions to 
acknowledge their fiduciary status and the fiduciary status of the 
Advisers with whom they contract in writing. The Financial Institution 
and Advisers would have to adhere to enforceable standards of fiduciary 
conduct and fair dealing with respect to their advice. In the case of 
IRAs and non-ERISA plans, the exemption would require that the 
standards be set forth in an enforceable contract with the Retirement 
Investor. Under the exemption's terms, the Financial Institution would 
not be required to enter into a contract with ERISA plan investors, but 
it would be obligated to adhere to these same standards of fiduciary 
conduct, which the investors could effectively enforce pursuant to 
ERISA section 502(a)(2) and (3).
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    \3\ For purposes of the proposed exemption, ``IRA'' means any 
account or annuity described in Code section 4975(e)(1)(B) through 
(F).
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    The proposed exemption is designed to cover commissions and other 
forms of compensation received in connection with the recommendation of 
Fixed Annuity Contracts. Rather than prohibit such compensation 
structures, the exemption would permit individual Advisers \4\ and 
related Financial Institutions to receive commissions and other common 
forms of compensation, provided that they implement appropriate 
safeguards against the harmful impact of conflicts of interest on 
investment advice. The proposed exemption strives to ensure that 
Advisers' recommendations reflect the best interest of their Retirement 
Investor customers, rather than the conflicting financial interests of 
the Advisers and the Financial Institutions with whom they contract. 
Protected Retirement Investors include plan participants and 
beneficiaries, IRA owners, and ``retail'' fiduciaries of plans or IRAs 
(generally persons who hold or manage less than $50 million in assets, 
and are not banks, insurance carriers, registered investment

[[Page 7338]]

advisers or broker dealers), including small plan sponsors.
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    \4\ By using the term ``Adviser,'' the Department does not 
intend to limit the exemption to investment advisers registered 
under the Investment Advisers Act of 1940 or under state law. For 
purposes of this proposal, an Adviser is an employee, independent 
contractor, or agent of an insurance intermediary that satisfies the 
definition of Financial Institution in the proposed exemption.
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    In order to protect the interests of plan participants and 
beneficiaries, IRA owners, and plan fiduciaries, the exemption would 
require the Financial Institution to acknowledge fiduciary status for 
itself and its Advisers. The Financial Institutions and Advisers would 
have to adhere to basic standards of impartial conduct. In particular, 
under the proposal's standards-based approach, the Adviser and 
Financial Institution must give prudent advice that is in the 
customer's best interest, avoid misleading statements, and receive no 
more than reasonable compensation. Additionally, Financial Institutions 
generally must adopt policies and procedures reasonably designed to 
mitigate any harmful impact of conflicts of interest, and disclose 
basic information about their conflicts of interest, the recommended 
Fixed Annuity Contract and the cost of their advice. The exemption is 
calibrated to align the Adviser's interests with those of the plan or 
IRA customer, while leaving the Adviser and Financial Institution the 
flexibility and discretion necessary to determine how best to satisfy 
the exemption's standards in light of the unique attributes of their 
business.

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.\5\ 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.\6\ When fiduciaries violate ERISA's fiduciary duties 
or the prohibited transaction rules, they may be held personally liable 
for the breach.\7\ In addition, violations of the prohibited 
transaction rules are subject to excise taxes under the Code.\8\
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    \5\ ERISA section 404(a).
    \6\ ERISA section 406. ERISA also prohibits certain transactions 
between a plan and a ``party in interest.''
    \7\ ERISA section 409; see also ERISA section 405.
    \8\ Code section 4975.
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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. Unlike participants in plans covered by Title I of 
ERISA, IRA owners do not have a statutory right to bring suit against 
fiduciaries for violations 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, ERISA section 3(21)(A) and Code section 4975(e)(3) 
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 beneficiaries, 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, the providers of investment advice are neither subject to 
ERISA's fundamental fiduciary standards, nor accountable under ERISA or 
the Code for imprudent, disloyal, or biased advice.
    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, plan participant or beneficiary, IRA or IRA owner, 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 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,'' 
which is defined as ``a communication that, based on its content, 
context, and

[[Page 7339]]

presentation, would reasonably be viewed as a suggestion that the 
advice recipient engage in or refrain from taking a particular course 
of action.'' \9\ 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.\10\
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    \9\ 29 CFR 2510.3-21(b)(1).
    \10\ See 81 FR 20946 (April 8, 2016).
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    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:
    (i) 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);
    (ii) the person 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;
    (iii) 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
    (iv) 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 Exchange Act (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

    The Department anticipates that the Regulation will cover many 
investment professionals who did not previously consider themselves to 
be fiduciaries under ERISA or the Code. Under the Regulation, these 
entities will be subject to the prohibited transaction restrictions in 
ERISA and the Code that apply specifically to fiduciaries. ERISA 
section 406(b)(1) and Code section 4975(c)(1)(E) prohibit a fiduciary 
from dealing with the income or assets of a plan or IRA in his own 
interest or his own account. ERISA section 406(b)(2), which does not 
apply to IRAs, provides that a fiduciary shall not ``in his individual 
or in any other capacity act in any transaction involving the plan on 
behalf of a party (or represent a party) whose interests are adverse to 
the interests of the plan or the interests of its participants or 
beneficiaries.'' ERISA section 406(b)(3) and Code section 4975(c)(1)(F) 
prohibit a fiduciary from receiving any consideration for his own 
personal account from any party dealing with the plan or IRA in 
connection with a transaction involving assets of 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.\11\ The 
prohibitions extend to a fiduciary causing 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 as a fiduciary. Likewise, a fiduciary is 
prohibited from receiving compensation from third parties in connection 
with a transaction involving the plan or IRA.\12\
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    \11\ Subsequent to the issuance of these regulations, 
Reorganization Plan No. 4 of 1978, 5 U.S.C. App. (2010), divided 
rulemaking and interpretive authority between the Secretaries of 
Labor and the Treasury. The Secretary of Labor was given 
interpretive and rulemaking authority regarding the definition of 
fiduciary under both Title I of ERISA and the Internal Revenue Code. 
Id. section 102(a) (``all authority of the Secretary of the Treasury 
to issue [regulations, rulings opinions, and exemptions under 
section 4975 of the Code] is hereby transferred to the Secretary of 
Labor'').
    \12\ 29 CFR 2550.408b-2(e); 26 CFR 54.4975-6(a)(5).
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    Investment professionals often receive compensation for services to 
Retirement Investors in the retail market through a variety of 
arrangements that violate the prohibited transaction rules applicable 
to plan fiduciaries. These include commissions paid by the plan, 
participant or beneficiary, or IRA, or commissions and other payments 
from third parties that provide investment products. A fiduciary's 
receipt of such payments would generally violate the prohibited 
transaction provisions of ERISA section 406(b) and Code section 
4975(c)(1)(E) and (F) because the amount of the fiduciary's 
compensation is affected by the use of its authority in providing 
investment advice, unless such payments meet the requirements of an 
exemption.

Prohibited Transaction Exemptions

    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. For example, ERISA section 408(b)(14) and 
Code section 4975(d)(17) specifically exempt transactions involving the 
provision of fiduciary investment advice to a participant or 
beneficiary of an individual account plan or IRA owner if the advice, 
resulting transaction, and the Adviser's fees meet stringent conditions 
carefully designed to guard against 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)

[[Page 7340]]

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, 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. However, when they choose to 
give advice in situations in which they have a conflict of interest, 
they must rely upon an exemption.
    Pursuant to its exemptive authority, the Department has previously 
granted several conditional administrative class exemptions that are 
available to fiduciary advisers in defined circumstances. As a general 
proposition, these exemptions focused on specific advice arrangements 
and provided relief for narrow categories of compensation. However, the 
new Best Interest Contract Exemption (PTE 2016-01) is specifically 
designed to address the conflicts of interest associated with the wide 
variety of payments advisers receive in connection with retail 
transactions involving plans and IRAs. Similarly, the Department has 
granted a new exemption for principal transactions, Exemption for 
Principal Transactions in Certain Assets between Investment Advice 
Fiduciaries and Employee Benefit Plans and IRAs (Principal Transactions 
Exemption) (PTE 2016-02),\13\ that permits investment advice 
fiduciaries to sell or purchase certain debt securities and other 
investments in principal transactions and riskless principal 
transactions with plans and IRAs.
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    \13\ 81 FR 21089 (April 8, 2016), as corrected at 81 FR 44784 
(July 11, 2016).
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    At the same time that the Department granted the new exemptions, it 
also amended existing exemptions to, among other things, ensure uniform 
application of the Impartial Conduct Standards, which are fundamental 
obligations of fair dealing and fiduciary conduct, and include 
obligations to act in the customer's best interest, avoid misleading 
statements, and receive no more than reasonable compensation.\14\ Taken 
together, the new exemptions and amendments to existing exemptions 
ensure that Retirement Investors are consistently protected by 
Impartial Conduct Standards, regardless of the particular exemption 
upon which the adviser relies.
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    \14\ The amended exemptions are Prohibited Transaction Exemption 
(PTE) 75-1; PTE 77-4; PTE 80-83; PTE 83-1: PTE 84-24, and PTE 86-
128. See 81 FR 21208; 21139; 21147; and 21181 (April 8, 2016).
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    The amendments also revoked in whole or in part certain existing 
exemptions, which provided little or no protections to IRA and non-
ERISA plan participants, in favor of a more uniform application of the 
Best Interest Contract Exemption in the market for retail investments. 
Most notably for purposes of this proposal, PTE 84-24,\15\ an exemption 
previously providing relief for transactions involving all annuity 
contracts, was amended to apply only to transactions involving ``fixed 
rate annuity contracts,'' as defined in the exemption.\16\ As a result, 
the exemption no longer provides relief for variable annuities, indexed 
annuities and any other annuities that do not satisfy the definition of 
fixed rate annuity contracts.
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    \15\ Class Exemption for Certain Transactions Involving 
Insurance Agents and Brokers, Pension Consultants, Insurance 
Companies, Investment Companies and Investment Company Principal 
Underwriters, 49 FR 13208 (April 3, 1984), as amended, 71 FR 5887 
(February 3, 2006), as amended 81 FR 21147 (April 8, 2016).
    \16\ The definition of ``fixed rate annuity contract'' in PTE 
84-24, as amended, 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.''
---------------------------------------------------------------------------

    With limited exceptions, it is the Department's intent that 
investment advice fiduciaries in the retail investment market rely on 
statutory exemptions, the Best Interest Contract Exemption or this 
proposed exemption, if granted, to the extent that they receive 
conflicted forms of compensation that would otherwise be prohibited. 
The new and amended exemptions reflect the Department's view that 
Retirement Investors should be protected by a more consistent 
application of fundamental fiduciary standards across a wide range of 
investment products and advice relationships, and that retail 
investors, in particular, should be protected by the stringent 
protections set forth in the Best Interest Contract Exemption or this 
proposed exemption, if granted. When fiduciaries have conflicts of 
interest, they will uniformly be expected to adhere to fiduciary norms 
and to make recommendations that are in their customer's best interest.

The Best Interest Contract Exemption

    In broadest outline, the Best Interest Contract Exemption permits 
Advisers and the Financial Institutions (as defined in the exemption) 
that employ or otherwise retain them to receive many common forms of 
compensation that ERISA and the Code would otherwise prohibit, provided 
that they give advice that is in their customers' best interest and the 
Financial Institution implements basic protections against the dangers 
posed by conflicts of interest. More specifically, under the Best 
Interest Contract Exemption, Financial Institutions generally must:
     Acknowledge fiduciary status with respect to investment 
advice to the Retirement Investor;
     Adhere to Impartial Conduct Standards requiring them to:
    [cir] 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 Adviser, Financial Institution, or their affiliates, related 
entities or other parties);
    [cir] Charge no more than reasonable compensation; and
    [cir] Make no misleading statements about investment transactions, 
compensation, and conflicts of interest;
     Implement policies and procedures reasonably and prudently 
designed to prevent violations of the Impartial Conduct Standards;
     Refrain from giving or using incentives for Advisers to 
act contrary to the customer's best interest; and
     Fairly disclose the fees, compensation, and material 
conflicts of interest, associated with their recommendations.
    Advisers relying on the exemption must adhere to the Impartial 
Conduct Standards when making investment recommendations. In order for 
relief to be available under the exemption, there must be a ``Financial 
Institution'' that meets the definition set forth in the exemption and 
that satisfies the applicable conditions.
    Section VIII(e) of the Best Interest Contract Exemption states that 
a ``Financial Institution'' can be a registered investment adviser 
(RIA), a bank or similar financial institution, a broker-dealer or an 
insurance company. The Department noted in the preamble to the 
exemption that these entities were identified by Congress as advice 
providers in the statutory exemption for investment advice under ERISA 
section 408(g) and Code section 4975(f)(8) and

[[Page 7341]]

that they are subject to well-established regulatory conditions and 
oversight.\17\ However, in response to requests to broaden the 
definition to include marketing and distribution intermediaries, the 
Department added section VIII(e)(5), which states that a Financial 
Institution also includes ``an entity that is described in the 
definition of Financial Institution in an individual exemption . . . 
that provides relief for the receipt of compensation in connection with 
investment advice provided by an investment advice fiduciary, under the 
same conditions as [the Best Interest Contract Exemption].'' \18\
---------------------------------------------------------------------------

    \17\ See 81 FR at 21067.
    \18\ See id.; id at 21083.
---------------------------------------------------------------------------

    Thus, although the definition of Financial Institution in the Best 
Interest Contract Exemption was limited to certain specified entities, 
the exemption provided a mechanism under which the definition can be 
expanded if an individual exemption is granted to another type of 
entity, under the same conditions. In that event, the individual 
exemption would provide relief to the applicants identified in the 
exemption, but the definition of Financial Institution in the Best 
Interest Contract Exemption would be expanded so that other entities 
that satisfy the definition in the individual exemption can rely on the 
Best Interest Contract Exemption. In the preamble to the Best Interest 
Contract Exemption, the Department stated that ``[i]f parties wish to 
expand the definition of Financial Institution to include marketing 
intermediaries or other entities, they can submit an application to the 
Department for an individual exemption, with information regarding 
their role in the distribution of financial products, the regulatory 
oversight of such entities, and their ability to effectively supervise 
individual Advisers' compliance with the terms of this exemption.'' 
\19\
---------------------------------------------------------------------------

    \19\ See id. at 21067.
---------------------------------------------------------------------------

    Pursuant to section VIII(e)(5) of the Best Interest Contract 
Exemption, the Department received 22 applications for individual 
exemptions from insurance intermediaries that contract with independent 
insurance agents to sell fixed annuities (applicants). The applicants 
describe themselves as ``independent marketing organizations,'' 
``insurance marketing organizations'' and ``field marketing 
organizations.''
    Collectively, the Department refers to the applicants and similar 
entities as either ``insurance intermediaries'' or ``IMOs.'' The 
applicants sought individual exemptions under the same conditions as 
the Best Interest Contract Exemption, but with a new definition of 
``Financial Institution'' incorporating insurance intermediaries.
    Because of the large number of applications, the Department 
determined to propose, on its own motion, a class exemption for such 
intermediaries based on the facts and representations in the individual 
applications received by the Department. The applicants employ a wide 
variety of business models and approaches, however, and the proposal, 
while designed to provide class relief for insurance intermediaries, 
may not be available to all the applicants depending on their 
individual circumstances. As discussed below, there are a variety of 
compliance options available to the insurance industry under the Best 
Interest Contract Exemption. This proposed exemption would supplement 
these options by permitting the IMO or other intermediary to act as a 
covered ``Financial Institution'' with supervisory responsibilities 
under specified conditions, many of which parallel the conditions of 
the Best Interest Contract Exemption. To the extent insurance 
intermediaries wish to pursue additional exemptive relief, the 
Department will consider such additional requests.
    Primarily, it is important to note that insurance intermediaries 
are not required to act as Financial Institutions under this exemption, 
if granted, in order to participate in the marketplace. They may 
provide valuable compliance assistance and other services to insurance 
companies or other insurance intermediaries that act as Financial 
Institutions under the Best Interest Contract Exemption or this 
exemption, if granted, and receive compensation for their services. In 
this regard, both the Best Interest Contract Exemption and this 
proposal, if granted, would specifically provide relief for 
compensation paid to ``affiliates'' and ``related entities'' of an 
Adviser and Financial Institution, which would typically include 
IMOs.\20\ Therefore, an IMO that does not meet the definition of 
Financial Institution under this proposal can nevertheless continue to 
work with an insurance company or other intermediary, and receive 
compensation, if the insurance agent and the insurance company or other 
intermediary complies with the conditions applicable to Advisers and 
Financial Institutions, respectively, in the Best Interest Contract 
Exemption or this exemption, if granted.\21\ As the Department noted in 
recent guidance, even if it decided not to grant this exemption, an 
insurer could bolster its oversight by contractually requiring an IMO 
to implement policies and procedures designed to ensure that all of the 
agents associated with the IMO adhere to the Impartial Conduct 
Standards. See FAQs about Conflict of Interest Rules and Exemptions, 
Part I, FAQs 22 and 23. Under this approach, the IMO could eliminate 
potentially troubling compensation incentives across all the insurance 
companies that work with the IMO. While the insurance company would 
remain responsible for compliance with the full Best Interest Contract 
Exemption, nothing in that exemption would preclude insurers from 
contracting with other parties, such as IMOs, for compliance work.
---------------------------------------------------------------------------

    \20\ If an IMO is not an affiliate or related entity, or 
otherwise a party in interest or disqualified person with respect to 
the plan or IRA, the IMO's receipt of payments as a result of an 
Adviser's advice would not be a prohibited transaction requiring 
compliance with an exemption.
    \21\ See FAQs about Conflict of Interest Rules and Exemptions, 
Part I, FAQs 22 and 23, https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-1.pdf.
---------------------------------------------------------------------------

    Alternatively, even without this new exemption, an insurer could 
take direct responsibility for supervising agents, regardless of 
whether it chooses to market its products through a captive sales 
force, independent agents, or other channels, much as insurers 
currently have responsibility to oversee the activities of their 
agents--including independent agents--under state-law suitability 
rules. As FAQ 22 noted, the insurer's responsibility under the Best 
Interest Contract Exemption is to oversee the recommendation and sale 
of its products, not recommendations and transactions involving other 
insurers. See FAQs about Conflict of Interest Rules and Exemptions, 
Part I, FAQ 22. Under the Best Interest Contract Exemption, the insurer 
must adopt and implement prudent supervisory and review mechanisms to 
safeguard the agent's compliance with the Impartial Conduct Standards 
when recommending the insurer's products; avoid improper incentives to 
preferentially push the products, riders, and annuity features that are 
the most lucrative for the insurer at the customer's expense; ensure 
that the insurer and agent receive no more than reasonable compensation 
for their services in connection with the transaction; and adhere to 
the disclosure and other conditions set forth in its exemption. Thus, 
for example, an insurer could adopt policies and procedures that 
require agents (including independent agents) to engage in a process 
specified by the

[[Page 7342]]

insurer for making prudent recommendations; review the agent's final 
recommendation in light of the customer's investment objectives, risk 
tolerance, financial circumstances, and needs; ensure that its own 
compensation practices are in line with industry standards for 
reasonable compensation for the agent's services; and avoid creating 
any misaligned incentives that encourage the Adviser to choose between 
the insurer's various offerings based on the financial interests of the 
insurer or its affiliates, rather than the customer's interest. If the 
insurer believes that an independent agent may be improperly motivated 
by the size of the insurer's commissions as compared to its 
competitors, it may need to review the agent's recommendations 
particularly carefully and seek additional assurances from the agent as 
to the basis of its recommendations. However, nothing in the Best 
Interest Contract Exemption requires the insurer to pay precisely the 
same compensation to its agents as its competitors, as long as the 
compensation is reasonable in relation to the services rendered, and 
the insurer carefully oversees the recommendations for compliance with 
the Impartial Conduct Standards.\22\
---------------------------------------------------------------------------

    \22\ In general, as noted in the Department's FAQs Part I, the 
Financial Institution can comply with its obligations to pay no more 
than reasonable compensation by being attentive to market prices and 
benchmarks for the services; providing the investor proper 
disclosure of relevant costs, charges, and conflicts of interest, 
prudently evaluating the customer's need for the services; and 
avoiding fraudulent or abusive practices with respect to the service 
arrangement. See FAQs about Conflict of Interest Rules and 
Exemptions, Part I, FAQ 33, https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-1.pdf.
---------------------------------------------------------------------------

Applicants for Individual Exemptions

    The following entities submitted applications for individual 
exemptions permitting them to act as Financial Institutions under the 
Best Interest Contract Exemption: Gradient Insurance Brokerage, Inc., 
C2P Advisory Group, LLC dba Clarity to Prosperity, Legacy Marketing 
Group, LLC, InForce Solutions, LLC, Futurity First Insurance Agency, 
Financial Independence Group, Brokers International Ltd, Insurance 
Advocates, Advisors Excel, AmeriLife Group, LLC, InsurMark, Annexus, 
Ideal Producers Group, ECA Marketing, Saybrus Partners, Inc., Alpine 
Brokerage Services, The Annuity Source, Inc., M&O Financial, Inc., 
Kestler Financial Group, Inc., First Income Advisors, Crump Life 
Insurance Services, Inc., and The IMPACT Partnership, LLC. The 
applicants provided background information on the distribution of fixed 
annuities, described their business models and discussed their 
anticipated approaches to compliance with the proposed exemption.

Distribution of Fixed Annuities

    As described by various applicants, fixed annuities--and in 
particular, fixed indexed annuities--are commonly distributed by 
independent insurance agents. Independent insurance agents distribute 
the products of not one insurance company, but rather multiple 
insurance companies.
    Typically, insurance intermediaries recruit, train and support 
independent insurance agents and market and distribute insurance 
products. Since the independent agents are not associated with any one 
particular insurance company, the intermediary steps in to develop 
sales processes, provide marketing material, and formulate supervisory 
procedures and methods for the independent agents to use. The insurance 
companies and the agents have come to rely on these insurance 
intermediaries to serve a wide variety of functions relating to the 
distribution of fixed annuities through the independent insurance agent 
channel. Insurance intermediaries commonly provide services that 
include: Agent recruitment and screening, licensing and contracting 
services, creation of product illustrations, case management, IT 
services, marketing services, new business processing, training and 
supervising agents and ensuring compliance with existing standards 
under state insurance law.
    Further, insurance intermediaries can serve an important compliance 
function. Insurance intermediaries may serve to facilitate statutory 
and regulatory compliance as well as help to resolve compliance issues 
that may arise between state regulators, the insurance company and an 
agent. In performing this role, insurance intermediaries can perform 
compliance reviews, create policies and procedures and vet the 
practices of agents. Many insurance intermediaries contractually 
require that an agent comply with specific standards that are set by 
the insurance intermediary, as well as the federal and state laws and 
regulations that govern insurance.
    Some insurance intermediaries currently work with the insurance 
companies to ensure that annuities sold by agents are ``suitable'' for 
their clients. This suitability standard generally requires agents and 
insurance companies to review detailed information about the client to 
determine if the fixed annuity purchase complies with the suitability 
standards under state insurance law (see 2010 NAIC Suitability in 
Annuity Transactions Model Regulation, which applicants state has been 
adopted by most state insurance regulators). In order to assist the 
insurance company and the agent, the insurance intermediary will ensure 
that the agent has considered, at a minimum, the client's prospective 
age, annual income, financial situation and needs (including the source 
of the funds used to purchase the annuity), financial experience, 
financial objectives, intended use of the annuity, financial time 
horizon, existing assets (including investment and life insurance), 
liquidity needs, liquid net worth, risk tolerance and tax status.
    The distribution services provided by the insurance intermediary 
generate multiple forms of compensation for the insurance intermediary. 
Most prominently, the sale of an annuity usually triggers the payment 
of a commission to the insurance intermediary. The commission can be 
based on many factors, including, but not limited to, the specific 
annuity product sold, the state in which it is sold, the premium amount 
and the age of the annuity owner. An insurance intermediary can also 
receive compensation for additional services, including, but not 
limited to, product development, marketing, administrative and 
compliance services and field support services. The specific 
compensation terms are generally spelled out in the contracts between 
the insurance intermediary and the insurance company and the insurance 
intermediary and the agent.
    The compensation payments received by insurance intermediaries may 
trigger prohibited transaction concerns under both ERISA and the Code. 
After the applicability date of the Regulation, insurance agents who 
recommend fixed annuity products will generally be fiduciaries with 
respect to a Retirement Investor's account. The receipt of a commission 
or other compensation by a fiduciary, or an entity in which the 
fiduciary has an interest that would affect its judgment as a 
fiduciary, as a result of the provision of investment advice is a 
prohibited transaction for which an exemption is needed.
    Under this fixed annuity distribution and compensation model, an 
insurance company could serve as a ``Financial Institution'' for 
purposes of the Best Interest Contract Exemption. However, the 
applicants express concern that insurance companies may not necessarily 
agree to satisfy the role of the Financial Institution under the Best 
Interest Contract Exemption with respect to independent insurance

[[Page 7343]]

agents, or may prefer to rely upon a captive sales force when relying 
upon that exemption. Additionally, some of the applicants stated that 
independent insurance agents do not want to lose the flexibility of 
their independent status.
    The applicants represent that the independent insurance agent model 
benefits consumers because independent agents can offer a wider variety 
of products to satisfy consumers' goals. Thus, the applicants take the 
position that permitting insurance intermediaries to serve as Financial 
Institutions will facilitate independent insurance agents' continued 
sale of fixed annuities in the Retirement Investor marketplace under a 
single set of policies and procedures. The exemption proposed herein 
would apply to commissions and other compensation received by an 
insurance agent, insurance intermediary, insurance companies and any 
other affiliates and related entities, as a result of a plan's or IRA's 
purchase of Fixed Annuity Contracts.

Business Models

    Many of the applicants stated that they had direct contractual 
relationships with the majority of the insurance companies for which 
they distribute fixed annuities. Frequently, these direct contractual 
relationships with the insurance companies assigned responsibility for 
the oversight of agents and sub-IMOs to the intermediaries. Some 
applicants indicated they are at the highest level of an insurance 
company's distribution hierarchy, or at the ``top-tier'' or ``top-
level.''
    As top-level IMOs, most applicants represented that they oversee 
independent, insurance-only agents or sub-IMOs (which in turn oversee 
independent insurance-only agents), or both. This oversight is 
accomplished through the top-level IMO's use of its compliance 
structure and other business and administrative tools. The applicants 
use their compliance structure to directly oversee agents or to assist 
sub-IMOs in the distribution of fixed annuities and the oversight of 
their agents. One applicant, however, stated that it is a sub-IMO. As a 
sub-IMO, the applicant represents that it has contractual relationships 
with the insurance companies for which it distributes fixed annuities, 
but that it also has a contractual relationship with a top-level IMO. 
The top-level IMO provides the sub-IMO with distribution and other 
support services. Further, the top-level IMO assists the sub-IMO in 
accessing a wide variety of insurance products. The sub-IMO represents 
that contracting with a top-level IMO to provide this access and these 
services allows it to focus on the training and support of its agents.
    Further, other applicants, in addition to describing themselves as 
top-level IMOs, also represented that they are affiliated with large 
insurance companies. One of these applicants wholly owns numerous sub-
IMOs. Despite the differences in the ownership structure, the 
applicants represent that they, like the other top-level IMOs, assist 
in the distribution of fixed annuities, both their affiliates' and 
those sold by other insurance companies, and provide valuable business 
and administrative assistance to sub-IMOs and agents.
    Finally, some applicants indicated that their services extend to 
assisting insurance companies in the design of insurance products.

Compliance Approach

    The applicants represented to the Department that they have broad 
experience that will contribute to their ability to satisfy the 
conditions of the exemption. Some applicants pointed to their 
experience in providing oversight of independent agents for insurance 
law compliance. A number of the applicants indicated that they planned 
to rely on affiliated registered investment advisers and/or broker-
dealer entities in developing systems to comply with the exemption.
    The applicants generally indicated that they would maintain 
internal compliance departments and adopt supervisory structures to 
ensure compliance with the exemption. Several applicants pointed to 
technology that they would use to ensure compliance. Some applicants 
indicated that insurance agents would be required to use the 
intermediary's technology to ensure that clients receive the 
disclosures and a contract, where required. Agents would also be 
required to use the intermediary's Web site services and maintain 
records centrally.
    Some of the applicants additionally described how their sales 
practices would ensure best interest recommendations. A number of the 
applicants plan to require centralized approval of agent 
recommendations; in some cases, the recommendations would be reviewed 
by salaried employees of the intermediary with additional credentials, 
such as Certified Financial Planners. One applicant indicated that 
internal review would include a comparison of the proposed product to 
other similar fixed indexed annuity products available in the 
marketplace in order to ensure it is appropriate for the purchaser, and 
that the analysis would include utilizing third party benchmarking 
services and industry comparisons. Another applicant indicated that it 
would ensure that an RIA representative would work with insurance-only 
agents where a recommendation would involve the liquidation of 
securities, to ensure that both state and federal securities laws are 
properly followed.
    Some applicants additionally stated that their contracts with 
insurance agents would include certain specific requirements, 
including: Adherence to the intermediary's policies and procedures with 
respect to advertising, market conduct and point of sale processes, 
transparency and documentation; provision of advice in accordance with 
practices developed by the intermediary; and agreement that the agents 
will not accept any compensation, direct or indirect, from an insurance 
company, except as specifically approved by the intermediary. A number 
of the applicants indicated that they would perform background checks 
and rigorous selection processes before working with agents and would 
require ongoing training regarding compliance with the exemption.
    A few of the applicants addressed product selection. These 
applicants indicated that agents making recommendations pursuant to the 
exemption would be limited to certain products and insurance companies. 
The applicants indicated there would be ongoing due diligence with 
respect to insurance companies and product offerings under the 
exemption.
    After consideration of the applicants' representations and the 
information provided in the applications, the Department has decided to 
propose a class exemption for insurance intermediaries. The proposal is 
described below.

Description of the Proposed Exemption

General

    Section I of the proposed exemption would provide relief for the 
receipt of compensation by insurance intermediary Financial 
Institutions and their ``Advisers,'' ``Affiliates,'' and ``Related 
Entities,'' as a result of the Adviser's or Financial Institution's 
provision of investment advice within the meaning of ERISA section 
3(21)(A)(ii) or Code section 4975(e)(3)(B) to a ``Retirement Investor'' 
regarding the purchase of a Fixed Annuity Contract. The proposed 
exemption would broadly provide relief from the restrictions of ERISA 
section 406(b) and the sanctions imposed by

[[Page 7344]]

Code section 4975(a) and (b), by reason of Code section 4975(c)(1)(E) 
and (F).\23\
---------------------------------------------------------------------------

    \23\ Relief is also proposed from ERISA section 406(a)(1)(D) and 
Code section 4975(c)(1)(D), which prohibit transfer of plan assets 
to, or use of plan assets for the benefit of, a party in interest 
(including a fiduciary).
---------------------------------------------------------------------------

    The definitions and conditions of the proposal vary in certain 
respects from those in the Best Interest Contract Exemption, as 
discussed below. The differences are intended to ensure that 
transactions involving fixed annuity contracts that are sold by 
independent insurance agents through insurance intermediaries occur 
only when they are in the best interest of Retirement Investors. Fixed 
indexed annuities, with their blend of limited financial market 
exposures and minimum guaranteed values, can play an important and 
beneficial role in retirement preparation, as the Department noted in 
its Regulatory Impact Analysis for the Regulation.\24\ At the same 
time, however, these annuities, which are anticipated to be the primary 
type of fixed annuities sold under this exemption, often pose special 
risks and complexities for investors.\25\ Furthermore, when the 
Department promulgated the Best Interest Contract Exemption, it limited 
Financial Institution status to entities with well-established 
regulatory conditions and oversight.\26\ Insurance intermediaries are 
not subject to the same regulatory oversight, and often have not played 
the same supervisory role with respect to advisers, as the Financial 
Institutions covered by that exemption. As a result of such 
considerations, this proposal contains a restricted definition of 
Financial Institution and additional required policies and procedures 
and disclosures.
---------------------------------------------------------------------------

    \24\ See Regulatory Impact Analysis for the Regulation, p. 8, 
available at www.dol.gov/ebsa.
    \25\ See Best Interest Contract Exemption, 81 FR 21001, 21017 
(April 8, 2016).
    \26\ See id. at 21067.
---------------------------------------------------------------------------

    These additional protections correspond to concerns, noted 
previously by the Department and expressed by other regulators, 
including the Securities and Exchange Commission (SEC) staff, the 
Financial Industry Regulatory Authority (FINRA), and the North American 
Securities Administrators Association, regarding fixed indexed 
annuities and the way they are marketed. Although indexed annuities are 
often sold as simple ``no risk'' products, they are neither simple nor 
risk free. Without proper care, Retirement Investors can all too easily 
be misled about the terms, guarantees, and risks associated with these 
products.
    As FINRA noted in its Investor Alert, ``Equity-Indexed Annuities: A 
Complex Choice'':

    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. \27\
---------------------------------------------------------------------------

    \27\ ``Equity-Indexed Annuities: A Complex Choice'' available at 
https://www.finra.org/investors/alerts/equity-indexed-annuities_a-complex-choice.

    FINRA also explained that equity-indexed annuities ``give you more 
risk (but more potential return) than a fixed annuity but less risk 
(and less potential return) than a variable annuity.'' \28\
---------------------------------------------------------------------------

    \28\ Id.
---------------------------------------------------------------------------

    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.' '' \29\ As the SEC 
staff additionally observed, ``[i]t 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.'' \30\
---------------------------------------------------------------------------

    \29\ SEC Office of Investor Education and Advocacy Investor 
Bulletin: Indexed Annuities, available at https://www.sec.gov/investor/alerts/secindexedannuities.pdf.
    \30\ Id.
---------------------------------------------------------------------------

    The North American Securities Administrators Association, the 
association of state securities regulators, 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.\31\
---------------------------------------------------------------------------

    \31\ 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 complexity and conflicted payment 
structures associated with fixed indexed annuities heighten the dangers 
posed by conflicts of interest when Advisers recommend these products 
to Retirement Investors. 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.
    Accordingly, the Department has taken care to address these 
concerns, while preserving the beneficial and important role these 
products can play for retirement investors.\32\ As noted above, when 
prudently recommended, fixed indexed annuities can promote investor 
interests because of their combination of limited financial market 
exposures and minimum guaranteed values. In addition, the Department 
seeks additional comments on insurers' ability to change the terms of a 
fixed indexed annuity contract during the life of the annuity, 
particularly during the period in which a surrender charge is in 
effect. To the extent that the insurer can change critical terms, such 
as the participation rate, indexing method,

[[Page 7345]]

cap, or relevant fees and charges, it can directly affect its own 
compensation. And to the extent it can make such changes during the 
surrender period, it can place the customer in a lose-lose situation: 
The customer must either accept an unfavorable change to the terms of 
the annuity or surrender the annuity and incur a charge against the 
amount of the annuity. The Department asks for comment on these issues 
and features, with the intent of providing additional guidance on them 
in the final exemption, if it is granted, or potentially limiting the 
exemption to annuity contracts that do not permit insurers to change 
critical terms during periods in which the customer is subject to a 
surrender charge or penalty. Specifically, the Department asks parties 
to provide information on how commonly fixed indexed annuity contracts 
are structured in this manner. In practice, how commonly do insurers 
make such changes to critical terms during surrender periods? What 
constraints are imposed on such conduct by state law or otherwise? 
Similarly, what constraints are placed on the size of surrender charges 
or the methodology for calculating the charges? How are these rights 
and practices disclosed to consumers? How commonly do insurers give 
consumers advance notice of the changes coupled with a right to 
withdraw assets without penalty before the changes take effect? To what 
extent can an Adviser prudently recommend a fixed indexed annuity if it 
is potentially subject to changes in key terms during the surrender 
period? To the extent insurers can unilaterally increase their 
compensation by changing key terms during the surrender period, do they 
need a separate exemption for the exercise of that authority? Finally, 
to what extent should the Department be concerned about similar issues 
with respect to fixed rate annuities?
---------------------------------------------------------------------------

    \32\ See Regulatory Impact Analysis for the Regulation, p. 8, 
available at www.dol.gov/ebsa.
---------------------------------------------------------------------------

Definition of Fixed Annuity Contract

    As stated above, the proposed exemption is limited to transactions 
involving Fixed Annuity Contracts. To ensure that the exemption would 
not be used more broadly than intended, the proposal includes a 
definition of Fixed Annuity Contract, which is ``an annuity contract 
that satisfies applicable state standard nonforfeiture laws at the time 
of issue and the benefits of which do not vary, in whole or in part, on 
the basis of the investment experience of a separate account or 
accounts maintained by the insurer. This includes both fixed rate 
annuity contracts and fixed indexed annuity contracts.'' The definition 
is intended to include fixed immediate annuities but exclude variable 
annuity contracts, which the Department understands are typically sold 
through securities distribution channels.
    If this proposed exemption is granted, therefore, relief will be 
available for sales of fixed rate annuities sold by insurance 
intermediaries and independent insurance agents under several different 
exemptions. Relief for all annuity sales is available under the Best 
Interest Contract Exemption if, as discussed above, an insurance 
company acts as the Financial Institution under the terms of that 
exemption. Alternatively, relief for fixed rate annuity contracts is 
available under PTE 84-24. By also proposing relief for such 
transactions in this exemption, the Department is not indicating that 
these other exemptions are unavailable. The intent is to provide 
flexibility to parties depending on their individual circumstances.
    The Department requests comment on the proposed definition of Fixed 
Annuity Contract. Does the definition adequately describe fixed 
annuities and carve out variable annuities? Are there other attributes 
of fixed annuity contracts that should be identified in the definition? 
Finally, should the definition address group annuity contracts, which 
may not be required to satisfy state nonforfeiture laws? Is relief 
necessary in this distribution channel for group annuity contracts? If 
so, should the definition provide that rather than satisfying the state 
nonforfeiture laws, the group annuity contract 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 the state that are applicable to 
individual annuities''? \33\
---------------------------------------------------------------------------

    \33\ See Final Amendment to PTE 84-24, 81 FR 21147, 21176 (April 
8, 2016) (definition of ``Fixed Rate Annuity Contract'').
---------------------------------------------------------------------------

Definition of Adviser

    The proposed definition of Adviser in Section VIII(a) generally 
mirrors the definition in the Best Interest Contract Exemption, 
although a reference to banking law was not included in this proposed 
definition as the Department did not believe it was relevant. The 
definition states:

    ``Adviser'' means an individual who:
    (1) Is a fiduciary of the Plan or IRA by reason of the provision 
of investment advice described in ERISA section 3(21)(A)(ii) or Code 
section 4975(e)(3)(B), or both, and the applicable regulations, with 
respect to the assets of the Plan or IRA involved in the recommended 
transaction;
    (2) Is an employee, independent contractor, or agent of a 
Financial Institution; and
    (3) Satisfies the federal and state regulatory and licensing 
requirements of insurance laws with respect to the covered 
transaction, as applicable.

    The Department requests comment on whether this definition 
accurately describes the relationship between independent insurance 
agents and insurance intermediaries who will serve as Financial 
Institutions under the exemption, and, if not, how the definition 
should be revised.

Definition of Financial Institution

    The proposal includes a new definition of Financial Institution 
that would apply with respect to insurance intermediaries. See Section 
VIII(e). As the Department stated in the preamble to the Best Interest 
Contract Exemption, the definition of Financial Institution in that 
exemption included entities identified in the statutory exemption for 
investment advice under ERISA section 408(g) and Code section 
4975(f)(8) and that are subject to well-established regulatory 
conditions and oversight.\34\ In addition, in that preamble, the 
Department requested that intermediaries seeking to serve as Financial 
Institutions provide information as to their ability to effectively 
supervise Advisers' compliance with the terms of the exemption.\35\ The 
applicants described their ability to oversee Advisers and proposed a 
variety of safeguards that they believed would be protective of 
Retirement Investors engaging in these transactions.
---------------------------------------------------------------------------

    \34\ See 81 FR 21067.
    \35\ See id.
---------------------------------------------------------------------------

    The proposed definition of Financial Institution is based on the 
applicants' representations and suggestions and the Department's 
additional analysis of how best to safeguard Retirement Investors' 
interests in this distribution channel. The components of the 
definition are intended to describe insurance intermediaries that are 
likely to be able to comply with the exemption and provide meaningful 
oversight of Advisers working in the fixed annuity marketplace. The 
proposal seeks to identify insurance intermediaries with the financial 
stability and operational capacity to implement the anti-conflict 
policies and procedures required by the exemption. Additionally, 
insurance intermediaries described in the definition are sufficiently 
large and established to stand behind their contractual and other 
commitments to Retirement Investors, and to police conflicts of 
interest associated with a

[[Page 7346]]

wide range of insurance products offered by a wide range of insurance 
companies.
    As an initial matter, the proposal defines a Financial Institution 
as an insurance intermediary that has a direct written contract 
regarding the distribution of Fixed Annuity Contracts with both the 
insurance company issuing the annuity contract and the Adviser or 
another intermediary (sub-intermediary) that has a direct written 
contract with the Adviser. Additional exemption conditions describe the 
terms of the required contract, see proposed Section II(d)(6) and (7). 
By requiring a contractual relationship between the insurance company 
and the intermediary, the proposal would ensure that the insurance 
intermediary and the insurance company have a direct relationship that 
will enable the insurance intermediary to satisfy its obligations under 
the exemption. By also requiring a contractual relationship between the 
intermediary and the Adviser or sub-intermediary, the proposal would 
further ensure that the intermediary will have the right to implement 
its oversight obligations as a Financial Institution pursuant to the 
requirements of the exemption, if granted. The Department requests 
comment on whether this condition should be adjusted to allow for 
multiple levels of intermediaries.
    In addition to the baseline contractual relationship requirement, 
the proposal sets forth a series of conditions that would apply to the 
insurance intermediary. Subsection (1) of the proposed definition would 
require the insurance intermediary to satisfy the applicable licensing 
requirements of the insurance laws of each state in which it conducts 
business. Accordingly, the intermediary would be required to operate in 
accordance with the states' requirements in this respect.
    Next, the proposal seeks to confirm that the insurance intermediary 
has sound business practices that have been reviewed by an independent 
entity. Subsection (2) of the proposed definition would require that 
the intermediary have financial statements that are audited annually by 
an independent certified public accountant. This condition would 
utilize the definition of Independent in Section VIII(f) of the 
proposed exemption.\36\ In addition, under proposed Section 
III(b)(vii), the audited financial statements must be provided on the 
Financial Institution's Web site.
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    \36\ Under section VIII(f), ``Independent'' means a person that: 
(1) Is not the Adviser, the Financial Institution or any Affiliate 
relying on the exemption; (2) Does not have a relationship to or an 
interest in the Adviser, the Financial Institution or Affiliate that 
might affect the exercise of the person's best judgment in 
connection with transactions described in this exemption; and (3) 
Does not receive or is not projected to receive within the current 
federal income tax year, compensation or other consideration for his 
or her own account from the Adviser, Financial Institution or 
Affiliate in excess of 2% of the person's annual revenues based upon 
its prior income tax year.
---------------------------------------------------------------------------

    This condition was suggested in several individual applications. 
Some applicants believed that periodic financial audits would provide 
reasonable assurance of the entity's financial health. The Department 
agrees. The Department anticipates that requiring an annual audit of 
the financial statements, coupled with the Financial Institution's web 
disclosures, will provide an opportunity for the Department and other 
interested persons to be alerted to any financial weaknesses or other 
items of concern with respect to the stability or solvency of the 
Financial Institution, or its ability to stand behind its commitments 
to Retirement Investors.
    As an alternative to an audit of financial statements, one 
applicant suggested that the audit should relate to the intermediary's 
internal controls and procedures. The applicant noted that banks and 
trust companies are currently required to obtain these reports under 
SSAE 16 (formerly SAS 70), and that the applicant could work with its 
auditors to prepare a similar report, but suggested that such an 
approach would require additional transition relief as the accounting 
industry would have to agree on the appropriate data points for an 
internal controls audit for an insurance intermediary and the resulting 
topics of the SSAE 16-like report.
    The Department requests comment on the utility of the proposed 
audited financial statements requirement as a protection of Retirement 
Investors, and the suggested alternative audit of internal controls and 
procedures. The Department also requests information on the cost of 
these alternatives to insurance intermediaries intending to rely on the 
exemption.

Insurance or Assets Set Aside for Potential Liability

    Subsection (3) of the proposed definition would require the 
Financial Institution to maintain fiduciary liability insurance, or 
unencumbered cash, bonds, bank certificates of deposit, U.S. Treasury 
Obligations, or a combination of all of these, available to satisfy 
potential liability under ERISA or the Code as a result of the firm's 
failure to meet the terms of this exemption, or any contract entered 
into pursuant to Section II(a). The aggregate amount of these items 
must equal at least 1% of the average annual amount of premium sales of 
Fixed Annuity Contracts by the Financial Institution to Retirement 
Investors over the prior three fiscal years of the Financial 
Institution. To the extent this condition is satisfied by insurance, 
the proposal states that the insurance must apply solely to actions 
brought by the Department of Labor, the Department of Treasury, the 
Pension Benefit Guaranty Corporation, Retirement Investors or plan 
fiduciaries (or their representatives) relating to Fixed Annuity 
Contract transactions, including but not limited to, actions for 
failure to comply with the exemption or any contract entered into 
pursuant to Section II(a), and it may not contain an exclusion for 
Fixed Annuity Contracts sold pursuant to the exemption. Any such 
insurance also may not have a deductible that exceeds 5% of the policy 
limits and may not exclude coverage based on a self-insured retention 
or otherwise specify an amount that the Financial Institution must pay 
before a claim is covered by the fiduciary liability policy. To the 
extent this condition is satisfied by retaining assets, the assets must 
be unencumbered and not subject to security interests or other 
creditors.
    This provision of the proposal seeks to ensure that the Financial 
Institution can stand behind its commitments to retirement investors 
and satisfy potential liabilities under the exemption. The Financial 
Institution's ability to back its commitments ensures that it can be 
held accountable when it violates its obligations and, thereby, 
promotes compliance. A number of the applicants specifically suggested 
that they would obtain insurance to cover potential liability under the 
exemption, although the approaches and suggested amounts varied. 
Additionally, as some applicants indicated uncertainty as to the 
current availability of insurance for liability under the exemption, 
the proposal would provide flexibility to the intermediaries to 
determine whether to acquire insurance or set aside assets to satisfy 
potential liability.
    The Department has concluded that the condition should be included 
in this proposal based on the suggestion of applicants, as well as its 
understanding that insurance intermediaries often are not legally 
required to maintain, and do not maintain, significant amounts of 
capital. Particularly because these entities do not necessarily have 
the sort of history of regulatory oversight and supervisory experience 
that characterize Financial Institutions identified in the

[[Page 7347]]

Best Interest Contract Exemption, the Department believes that this 
additional condition is a necessary enhancement of the protections 
necessary to ensure that the intermediaries maintain full 
responsibility for compliance with the proposed exemption's conditions.
    The Department requests comment on the approach taken in proposed 
subsection (3) of the definition. First, do commenters agree that the 
exemption should specify that insurance/assets should be based on a 
percentage of prior sales of Fixed Annuity Contracts? Is a three-year 
average an appropriate method for determining the amount of premium 
sales? Should a different and or minimum/maximum amount be specified, 
or should there be no specific level at all? For example, should the 
exemption instead require that a ``reasonable'' amount of insurance be 
obtained or assets set aside? As an additional protection for 
Retirement Investors, should individual Advisers be required to carry 
insurance themselves?
    Moreover, should the final exemption retain the proposal's approach 
of allowing Financial Institutions flexibility to either obtain 
fiduciary liability insurance or set aside assets to satisfy potential 
liabilities? If the Department adopts this approach, should it specify 
how assets should be held (i.e., in an escrow account) in order to 
ensure they are available in the event there is a judgment against the 
intermediary? Further, should the condition describe with more 
specificity which assets are acceptable, how they are to be valued, or 
how they are to be insulated from the claims of creditors other than 
Retirement Investors? As an alternative, should the final exemption 
require both fiduciary liability insurance coverage and a minimum level 
of assets set aside? If so, how should the requirement for a minimum 
level of assets be defined?

Premium Threshold

    Finally, subsection (4) of the proposed definition would require 
the insurance intermediary to have had annual Fixed Annuity Contract 
sales averaging at least $1.5 billion in premiums over each of the 
three prior fiscal years to qualify as a Financial Institution. This 
proposed threshold is intended to identify insurance intermediaries 
that have the financial stability and operational capacity to implement 
the anti-conflict policies and procedures required by the exemption. 
The proposed condition aims to ensure that the insurance intermediary 
is in a position to meaningfully mitigate compensation conflicts across 
products and insurers, which is a critical safeguard of the exemption, 
as proposed. Although this proposed threshold would limit entities that 
could operate as the supervisory Financial Institution to larger 
intermediaries, it would not prevent smaller intermediaries from 
working with larger intermediaries, similarly to how some of them 
currently operate.
    The proposed $1.5 billion threshold is based on a variety of 
factors. The intermediaries that approached the Department for 
individual exemptions and expressed their willingness and ability to 
function in a supervisory capacity to mitigate conflicts generally 
indicated sales of this amount or more in their applications, although 
not all applicants provided this information. Additionally, the 
Department believes that the $1.5 billion dollar threshold will cover 
those intermediaries that are most likely to make beneficial use of the 
exemption because economies of scale are likely to yield advantages in 
efficiently carrying out compliance responsibilities under this 
proposed exemption, especially if they step into the role that 
insurance companies would otherwise serve under the Best Interest 
Contract Exemption. The Department is also concerned that the 
conditions of the exemption will not serve their purpose in protecting 
Retirement Investors from conflicts of interest if the insurance 
intermediary does not have the requisite experience and resources to be 
able to effectively mitigate the potential adverse impact of these 
incentives.
    To this point, the Department questions whether intermediaries with 
lower levels of annual sales will be able to effectively mitigate 
conflicts in an environment that is so heavily dependent on commission 
compensation, particularly without the history of regulatory oversight 
and supervisory experience that characterize other Financial 
Institutions, such as banks, insurance companies, and broker-dealers. 
One of the chief reasons for extending Financial Institution status to 
insurance intermediaries is their ability to mitigate the conflicts of 
interest posed by the variable compensation that independent agents may 
receive from different insurance companies paying different 
compensation. Sufficiently large intermediaries that sell many products 
from a wide variety of insurance companies are in a position to control 
the compensation that the agent stands to receive from the various 
insurers and products and, thereby, minimize or eliminate the 
independent agents' conflicts of interest in choosing between insurance 
companies and products. In addition, the anti-conflict purpose of the 
exemption's conditions would not be served with respect to an entity 
that is so small that the difference between the firm's conflicts and 
the individual advisers' conflicts is essentially non-existent.
    The proposed requirement that the premium threshold be met using 
the preceding three-year average is intended, again, to identify 
intermediaries with an established history of significant sales. 
However, it is not intended as a barrier to new entities becoming 
Financial Institutions or for smaller intermediaries to operate under 
this exemption, albeit not as a Financial Institution. The Department 
notes that while a large intermediary would be responsible for acting 
as the Financial Institution under the exemption, smaller 
intermediaries will typically be eligible to obtain prohibited 
transaction relief under the proposed exemption's provisions that 
extend to ``affiliates'' and ``related entities.'' In this regard, the 
Department understands that the marketplace of intermediaries that 
distributes fixed annuities is hierarchical. Smaller intermediaries 
commonly work with larger intermediaries, and receive materials and 
support from the larger intermediaries in exchange for a fee or a 
portion of the sales commission. Therefore, smaller intermediaries 
could obtain relief from ERISA's prohibited transaction rules as long 
as there is an intermediary in their distribution hierarchy that acts 
as the Financial Institution and provides the requisite anti-conflict 
and supervisory role under the exemption, including execution of the 
best interest contract.\37\ Accordingly, where several intermediaries 
(a top-level intermediary and one or more sub-intermediaries) receive 
commission compensation in connection with an annuity transaction, each 
intermediary would be eligible for prohibited transaction relief under 
this proposed exemption, although only one would act as the Financial 
Institution and need to satisfy the premium threshold.
---------------------------------------------------------------------------

    \37\ If an intermediary is not an affiliate or related entity, 
or otherwise a party in interest or disqualified person with respect 
to the plan or IRA, the intermediary's receipt of payments as a 
result of an Adviser's advice would not be a prohibited transaction 
requiring compliance with an exemption.
---------------------------------------------------------------------------

    Importantly, in determining whether an intermediary meets the $1.5 
billion threshold, each intermediary that receives a commission for an 
annuity transaction could count the total premium amount involved 
towards the required premium threshold. This will facilitate the 
ability of smaller intermediaries to satisfy the premium

[[Page 7348]]

threshold under this exemption, and act as a Financial Institution, if 
desired. For example, assume an Annuity Adviser contracts with IMO A, 
which in turn is a part of IMO B's network. IMO B is a Financial 
Institution under this exemption. If Annuity Adviser sells an annuity 
to a Retirement Investor for $100,000, both IMO A and IMO B can count 
the $100,000 towards their own $1.5 billion threshold. If IMO A 
eventually reaches the $1.5 billion threshold (averaged over three 
years), it could act as a Financial Institution under this exemption, 
but would not be required to do so, as long as IMO B or another 
Financial Institution acts in the requisite role.
    The Department notes that applicants suggested various other 
methods of defining which intermediaries should qualify as Financial 
Institutions. The most prevalent suggestion was to limit the exemption 
to ``top tier'' intermediaries with a significant number of direct 
relationships with insurance carriers. The ``top tier'' intermediary 
was generally described as the entity at the top of an insurance 
carrier's distribution hierarchy. Some applicants stated that the 
exemption should focus on the ``top tier'' intermediaries because such 
entities have a closer tie with the insurance company.
    The Department's proposal is not limited to intermediaries with 
``top tier'' status. As an initial matter, the Department understands 
that many insurance intermediaries have direct contracts with insurance 
carriers regardless of the intermediary's size and it may not be clear 
whether a particular contractual relationship is properly characterized 
as a ``top tier'' relationship. Additionally, even assuming that ``top 
tier'' could be defined objectively, the Department is not certain that 
status at the top of an insurance company's distribution hierarchy is 
necessary to indicate that an intermediary is an established entity 
capable of providing effective oversight of Advisers and mitigating 
compensation incentives. Accordingly, the Department has tentatively 
concluded that the premium threshold is a better indicator that an 
intermediary can serve these functions based on its involvement in a 
significant amount of sales over its three prior fiscal years.
    The Department requests comment on a variety of aspects of the 
proposed premium threshold condition and possible alternatives. First, 
the Department seeks comment on alternative approaches to identifying 
intermediaries that are likely to be able to comply with the exemption 
and provide meaningful oversight of Advisers working in the fixed 
annuity marketplace. More specifically, the Department asks whether 
focusing on premium levels is an effective measure of compliance and 
conflict mitigation capability. The Department also seeks comment on 
the requirement that the premium condition be met by averaging premiums 
over the preceding three fiscal years. In particular, the Department 
asks the following questions:

--Is the $1.5 billion threshold likely to identify intermediaries with 
the history and capability of handling supervisory and regulatory 
compliance of this nature? If there is a threshold, should it be set at 
a different level?
--If a premium threshold is adopted, should it be indexed to grow with 
consumer price inflation or some other reference?
--If a premium threshold is included, is basing it on an average over 
the prior three years an effective way to account for fluctuations in 
annual sales to ensure intermediaries have certainty that they will 
continue to qualify as a Financial Institution? Are there alternative 
ways to address annual sales fluctuations to provide such certainty?
--In addition to entities that have satisfied the premium threshold, 
should the Financial Institution definition extend to entities with a 
``reasonable expectation'' of meeting the threshold over the next three 
years, to ensure that newer or growing entities can more readily become 
Financial Institutions? Would a subjective threshold of this type 
provide adequate protections to Retirement Investors? How should the 
exemption apply to intermediaries that fail to meet the threshold, 
notwithstanding their previously ``reasonable expectation'' that they 
would meet the threshold?
--If the exemption did not include a premium threshold, would smaller 
intermediaries nevertheless be likely to rely on larger intermediaries 
for exemption compliance due to cost savings, efficiency, or other 
reasons?
--Are there a large number of smaller intermediaries selling fixed 
annuities that do not work with any other intermediaries that could 
satisfy the $1.5 billion or similar threshold?
--Should the premium threshold apply specifically to fixed annuity 
sales, or should it apply more broadly to all sales of insurance and 
annuity products? If it applies to insurance sales other than fixed 
annuities, how should premiums for those sales be measured?
--As an alternative or in addition to a premium threshold, should the 
exemption have a threshold based on the number of annuity contracts 
sold by the intermediary annually?
--Should a ``top tier'' requirement replace or be added to a premium 
threshold requirement? If so, how would the Department define ``top 
tier'' status, and should intermediaries be required to have a certain 
minimum number of contractual relationships with different insurance 
companies to satisfy such a requirement?
--Alternatively, or in addition to, either a premium threshold or a 
``top tier'' requirement, should the exemption require that the 
intermediary also have agreements to sell fixed annuities with a 
specified minimum number of different insurance companies? If so, what 
would be an appropriate minimum number and why?
--Are there other conditions (e.g., minimum number of employees, annual 
revenue threshold, capitalization requirement) that would satisfy the 
Department's intent to ensure the covered Financial Institutions are 
able and likely to comply with the exemption and engage in meaningful 
oversight of Advisers working in the fixed annuity marketplace?

Conditions

    Sections II through V of the proposal contain the conditions 
proposed for relief under the exemption. The conditions are the same as 
the Best Interest Contract Exemption in many respects, but some of the 
conditions have been revised, augmented or deleted, as discussed in 
this section. The Department requests comments on these revisions.

Sections II(a), (b), (c)

    Section II sets forth the requirements that establish the 
Retirement Investor's enforceable right to adherence to the Impartial 
Conduct Standards and related conditions. For advice to certain 
Retirement Investors--specifically, advice regarding IRA investments, 
and plans that are not covered by Title I of ERISA (non-ERISA plans), 
such as plans covering only partners or sole proprietors--Section II(a) 
requires the Financial Institution and Retirement Investor to enter 
into a written contract that includes the provisions described in 
Section II(b)-(d) of the exemption and that also does not include any 
of the ineligible provisions described in

[[Page 7349]]

Section II(f) of the exemption. Financial Institutions additionally 
must provide the disclosures set forth in Section II(e).\38\
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    \38\ Unlike the Best Interest Contract Exemption, this proposal 
does not contain provisions addressing relief in the event of the 
failure to enter into a contract. See Best Interest Contract 
Exemption, section II(a)(1)(iii). This provision was included in the 
Best Interest Contract Exemption to address concerns voiced 
generally in the context of mutual fund transactions. Commenters 
raised concerns that it would be possible for a Retirement Investor 
to receive advice from an Adviser to enter into a transaction but 
fail to open an account with the particular Adviser or Financial 
Institution, yet nevertheless follow the advice in a way that 
generates additional compensation for the Financial Institution or 
an affiliate or related entity. The Department does not anticipate 
that such concerns are present in the context of the annuity 
transactions covered in this proposal and has therefore not included 
provisions in this proposal to parallel section II(a)(1)(iii) of the 
Best Interest Contract Exemption; however, the Department requests 
comment on this approach.
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    The contract with Retirement Investors regarding IRAs and non-ERISA 
plans must include the Financial Institution's acknowledgment of its 
fiduciary status and that of its Advisers, as required by Section II(b) 
and the Financial Institution's agreement that it and its Advisers will 
adhere to the Impartial Conduct Standards as required by Section II(c). 
The Impartial Conduct Standards require Advisers and Financial 
Institutions to provide 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 Adviser, Financial Institution, or their affiliates, related 
entities or other parties); charge no more than reasonable 
compensation; and make no misleading statements about investment 
transactions, compensation, and conflicts of interest. These provisions 
are unchanged from the Best Interest Contract Exemption.
    In this regard, the Department cautions Financial Institutions and 
Advisers to avoid inaccurate or misleading statements regarding the 
risk characteristics of fixed indexed annuity contracts, particularly 
statements that inaccurately suggest these products have only upside 
potential and no risk of loss of principal. See Equity-Indexed 
Annuities: Member Responsibilities for Supervising Sales of 
Unregistered Equity-Indexed Annuities, available at http://www.finra.org/industry/notices/05-50. In particular, firms and Advisers 
violate the Impartial Conduct Standards if they fail to explain any 
limitations on the upside of the investments (e.g., as imposed by caps, 
participation rates, and crediting practices), or if they falsely 
describe fixed indexed annuities as ``no risk'' products or state that 
there can be no loss of principal with Fixed Annuity Contracts, without 
acknowledging the potential impact of surrender charges or other 
provisions that could, in fact, result in the consumer's receiving less 
than he or she paid for the contract. As further discussed below, this 
proposal includes a new proposed Section II(d)(4) that would require 
that, as part of the policies and procedures requirement, the Financial 
Institution approve marketing materials used by Advisers, to increase 
oversight in this area.

Section II(d)--Policies and Procedures

    Under Section II(d), the Financial Institution must warrant that it 
has adopted, and in fact must comply with, anti-conflict policies and 
procedures reasonably and prudently designed to ensure that Advisers 
adhere to the Impartial Conduct Standards. The policies and procedures 
requirements generally include all the elements in the Best Interest 
Contract Exemption, including the requirement that the Financial 
Institution designate a person or persons responsible for addressing 
material conflicts of interest and monitoring Advisers' adherence to 
the Impartial Conduct Standards. See Section II(d)(2).

Proposed Section II(d)(3)

    Proposed Section II(d)(3) specifically addresses incentives to 
Advisers, and provides that the Financial Institution's policies and 
procedures must prohibit the use of quotas, appraisals, or performance 
or personnel actions, bonuses, contests, special awards, differential 
compensation, or other actions or incentives if they are intended or 
would reasonably be expected to cause Advisers to make recommendations 
that are not in the best interest of the Retirement Investor. The 
condition applies regardless of the source of the incentive. 
Independent insurance agents distribute the products of multiple 
insurance companies and accordingly, may be subject to more than one 
company's incentives. In some cases, the agents may also work for more 
than one intermediary. Under the terms of the exemption, however, the 
intermediary would be expected to ensure that these arrangements did 
not incentivize the agents to make recommendations that run counter to 
the best interest standard.
    The insurance intermediaries indicated they are well positioned to 
mitigate the impact of the competing financial incentives offered by 
multiple insurance companies. Consistent with the intermediaries' 
representations, one of the key protections of this exemption is the 
requirement that the insurance intermediary Financial Institution 
manage the conflicts of interest that independent agents and other 
Advisers face in recommending the products of multiple insurance 
companies. Proposed Section II(d)(3) would tolerate differential 
compensation--regardless of source--only to the extent that it is not 
intended or reasonably expected to cause Advisers to make 
recommendations that are not in the best interest of the Retirement 
Investor. Financial Institutions can allow Advisers to receive 
differential compensation if it is justified by neutral factors tied to 
the differences in the services delivered to Retirement Investors. See 
Best Interest Contract Exemption, 81 FR at 21039-40 (preamble 
discussion of neutral factors analysis); FAQs about Conflict of 
Interest Rules and Exemptions, Part I, FAQ 9 (addressing compensation 
incentives).\39\
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    \39\ See https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-1.pdf. This is a broader requirement for the elimination or 
mitigation of conflicts of interest than would apply to an 
individual insurance company relying on section II(d)(3) of the Best 
Interest Contract Exemption. As discussed above (and in the 
Department's FAQ 22), the insurer's responsibility under the Best 
Interest Contract Exemption is to oversee the recommendation and 
sale of its products, not recommendations and transactions involving 
other insurers. Thus, under the Best Interest Contract Exemption, 
the insurance company has an obligation to ensure that it and its 
affiliates and related entities do not use or create inappropriate 
incentives, but it does not have an obligation to control the 
compensation incentives independently created by other insurance 
companies or parties. The different business model of IMOs and other 
intermediaries, however, enables them to broadly eliminate 
differential compensation that is not tied to neutral factors based 
upon differences in the services provided by the Adviser. This 
exemption requires them to eliminate such differentials and to avoid 
misaligned incentives with respect to all the independent agent's 
recommendations.
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    The Department views this as a critical safeguard of this proposed 
exemption. The proposed condition is intended to ensure that an 
Adviser's relationship with multiple insurance companies and even 
multiple insurance intermediaries does not generate compensation or 
incentive structures that undermine the Adviser's provision of advice 
that is in Retirement Investors' best interest.
    Proposed Section II(d)(3) retains the principles based approach of 
the Best Interest Contract Exemption, and does not purport to detail 
any single approach for compliance with the condition. A number of 
applicants indicated that they expect their

[[Page 7350]]

relationships with Advisers to be exclusive with respect to the sale of 
Fixed Annuity Contracts to Retirement Investors. In that case, the 
Financial Institution would have a ready means of supervising the 
insurers and product that the Adviser recommended and controlling 
associated incentive structures. The proposal does not mandate 
exclusivity, however; a Financial Institution could alternatively 
require an Adviser to provide information to the Financial Institution 
regarding all the compensation and incentives provided by all the other 
insurance companies and intermediaries through which the Adviser sells 
Fixed Annuity Contracts. Whatever approach is adopted by a Financial 
Institution, the Financial Institution will ultimately be responsible 
for implementing the policies and procedures across all the Advisers' 
incentive arrangements.

New Proposed Policies and Procedures Requirements

    A new proposed Section II(d)(4) would require Financial 
Institutions to approve in advance all written marketing materials used 
by Advisers after determining that such materials provide a balanced 
description of the risks and features of the annuity contracts to be 
recommended. The condition ensures that Advisers are not using 
marketing materials that do not fully and fairly disclose the risks and 
characteristics of an annuity.
    New proposed Section II(d)(5) would impose additional requirements 
on the person or persons designated as responsible for addressing 
material conflicts of interest and monitoring Advisers' adherence to 
the Impartial Conduct Standards. The new section would require the 
person to approve, in writing, recommended annuity applications 
involving Retirement Investors prior to transmitting the applications 
to the insurance company. While a specific approval requirement is not 
in the Best Interest Contract Exemption, a number of applicants 
suggested they would have internal compliance departments review 
recommendations prior to the transmittal of an annuity contract to an 
insurance company. The condition would reinforce the duty of the 
Financial Institution to monitor and supervise the Advisers operating 
within the Financial Institution's distribution chain. This may be 
particularly important when there are sub-intermediaries, who may be 
more involved in day-to-day activities, between the Adviser and the 
Financial Institution.
    The proposal also would establish certain specific requirements for 
the relationship between the insurance intermediary and the Adviser. 
Section II(d)(6) would specify certain aspects of the written contract 
between the Financial Institution and the Adviser or sub-intermediary. 
First, the Financial Institution must require in its written contract 
with the Adviser or sub-intermediary that Advisers may use written 
marketing materials only if they are approved by the Financial 
Institution. As discussed above, Section II(d)(4) of this proposal 
would require Financial Institutions to approve in advance all written 
marketing materials used by Advisers after determining that such 
materials provide a balanced description of the risks and features of 
the annuity contracts to be recommended.
    Second, Advisers must be required to provide the transaction 
disclosure required by Section III(a) of the exemption and orally 
review the annuity-specific information required in Section III(a)(1) 
with the Retirement Investor, as discussed below. These marketing and 
disclosure conditions address the Department's objective that Advisers 
and Financial Institutions relying on the exemption should describe 
recommended annuity contracts fully and fairly, and that the Retirement 
Investor must be made aware of aspects of the annuity contract that 
could impact the amounts ultimately paid to the Retirement Investor.
    New proposed Section II(d)(7) sets forth requirements that would 
govern the compensation of the Adviser and sub-intermediary. The 
applicants described two broad approaches to paying compensation, and 
Section II(d)(7) permits both. Under the first approach, all 
compensation to be paid to the Adviser or sub-intermediary with respect 
to the purchase of an annuity contract pursuant to the exemption must 
be paid to the Adviser or sub- intermediary exclusively by the 
insurance intermediary. Under this approach, the intermediary would 
contract with insurance companies to receive the entire commission 
itself, and then, in turn, would pay an Adviser and/or any sub-
intermediary a portion of the commission.
    Under the second approach, Advisers or sub-intermediaries could 
receive commissions from insurance companies for the sale of annuities 
to Retirement Investors provided that the commission structure was 
approved in advance by the insurance intermediary and all forms of 
compensation other than commissions, whether cash or non-monetary, are 
paid to the Adviser or sub-intermediary exclusively by the insurance 
intermediary. In this approach, insurance companies can continue the 
practice of paying commissions directly to agents, with an override 
payment going to the intermediary.
    Under the proposal, the insurance intermediary may elect either 
compensation approach or some combination of the two. The proposal 
offers this flexibility because different applicants had different 
preferences for accomplishing the same general result, that the 
insurance intermediaries take responsibility for Adviser compensation 
and other incentives. Some applicants preferred to take in all 
compensation from insurance companies in order to facilitate compliance 
with the exemption and avoid the potential for errors. Other applicants 
preferred the second approach, expressing the view that it would not 
require the establishment of new internal accounting procedures and the 
engagement of additional personnel.\40\
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    \40\ Several applicants indicated an interest in offering 
Advisers product-neutral incentives based solely on levels of sales 
activity. If this exemption is granted, entities relying on it would 
be subject to Section II(d)(3), under which Financial Institution 
must prohibit the use of quotas, appraisals, performance or 
personnel actions, bonuses, contests, special awards, differential 
compensation or other actions or incentives that are intended or 
would reasonably be expected to cause Advisers to make 
recommendations that are not in the best interest of the Retirement 
Investor. The extent to which such incentive programs satisfy the 
requirements of Section II(d) of the exemption (or the Best Interest 
Contract Exemption) would be based on all the factors surrounding 
the incentive programs. The Department has provided guidance on 
related issues in the context of compensation grids that escalate 
based on sales volume. See FAQs about Conflict of Interest Rules and 
Exemptions, Part I, FAQ9, https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/coi-rules-and-exemptions-part-1.pdf. These principles would apply equally to 
Financial Institutions under this proposed exemption, if granted. In 
particular, the Department cautions against compensation and other 
incentives that are disproportionate and can undermine the best 
interest standard and create misaligned incentives for Advisers to 
make recommendations based on their own financial interest, rather 
than the customer's interest in sound advice.
---------------------------------------------------------------------------

    A new proposed Section II(d)(8) would also require that Financial 
Institutions provide, and require Advisers to attend, annual training 
on compliance with the exemption, conducted by a person who has 
appropriate technical training and proficiency with ERISA and the Code. 
The training must, at a minimum, cover the policies and procedures, the 
Impartial Conduct Standards, material conflicts of interest, ERISA and 
Code compliance (including applicable fiduciary duties and the 
prohibited

[[Page 7351]]

transaction provisions), ethical conduct, and the consequences for not 
complying with the conditions of this exemption (including any loss of 
exemptive relief provided herein). The Department notes that a number 
of the applicants emphasized the importance of training. The Department 
agrees and emphasizes that Advisers must be trained on important areas 
that are key to understanding their duty to Retirement Investors under 
the exemption and that are not likely covered by state insurance laws.

Sections II(e), (f) and (g)

    Section II(e) requires the Financial Institution to disclose 
information about its services and applicable fees and compensation. 
Section II(e) is generally unchanged from the Best Interest Contract 
Exemption, although some of the provisions were revised in minor ways 
to reflect the fact that this proposed exemption is limited to Fixed 
Annuity Contracts.
    Like the Best Interest Contract Exemption, Section II(e)(7) of this 
proposal would require the Financial Institution to disclose whether or 
not the Adviser and Financial Institution will monitor the Retirement 
Investor's annuity contract and alert the Retirement Investor to any 
recommended change to the contract, and, if monitoring, the frequency 
with which the monitoring will occur and the reasons for which the 
Retirement Investor will be alerted. Financial Institutions and their 
Advisers should not disclaim responsibility for monitoring if they will 
receive ongoing compensation justified in whole or in part based on the 
provision of such monitoring services.
    Section II(f) generally provides that the exemption is unavailable 
if the contract includes exculpatory provisions or provisions waiving 
the rights and remedies of the plan, IRA or Retirement Investor, 
including their right to participate in a class action in court. The 
contract may, however, provide for binding arbitration of individual 
claims, and may waive contractual rights to punitive damages or 
rescission to the extent permitted by governing law. Pursuant to 
Section II(g) of the exemption, advice to Retirement Investors 
regarding ERISA plans does not have to be subject to a written 
contract, but Advisers and Financial Institutions must comply with the 
substantive standards established in Section II(b)-(e) to avoid 
liability for a non-exempt prohibited transaction. These conditions are 
unchanged from the Best Interest Contract Exemption.
    Section II(h) of the Best Interest Contract Exemption established 
streamlined conditions for ``level fee fiduciaries'' defined in section 
VIII(h) of that exemption. Under that definition, a Financial 
Institution and Adviser can be level fee fiduciaries if the only fee 
received by them and their affiliates is a ``level fee'' that is 
disclosed in advance to the Retirement Investor. A ``level fee'' is 
defined as a fee or compensation that is provided as a fixed percentage 
of the value of the assets or a set fee that does not vary with the 
particular investment recommended, rather than a commission or other 
transaction-based fee.
    This proposal, however, does not include provisions for ``level fee 
fiduciaries.'' Although some of the applicants acknowledged they would 
level commissions across product categories, the mere leveling of 
commissions would not cause these Advisers and Financial Institutions 
to be ``level fee fiduciaries'' as defined in the Best Interest 
Contract Exemption because each purchase of a fixed annuity by a 
Retirement Investor would initiate the payment of a commission based on 
that particular transaction. The Department seeks comment on this 
aspect of the proposal. Are there business models in existence for the 
recommendation and sale of Fixed Annuity Contracts that would satisfy 
the level fee provisions of the Best Interest Contract Exemption, as 
described above? \41\
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    \41\ Similarly, provisions applicable to ``bank networking 
arrangements'' are not included in this proposal, although they are 
in the Best Interest Contract Exemption. See Best Interest Contract 
Exemption, sections II(i) and VIII(c). Bank networking arrangements 
are defined to involve only banks or similar financial institutions, 
or savings associations and are therefore considered inapplicable to 
insurance intermediaries.
---------------------------------------------------------------------------

Section III

    Section III proposes certain disclosure requirements, in addition 
to the disclosures in Section II(e) of the exemption. Section III(a)'s 
provisions on ``transaction disclosure'' generally require the 
disclosure of material conflicts of interest and basic information 
relating to those conflicts and the advisory relationship. In this 
respect, the proposal mirrors the Best Interest Contract Exemption.
    In addition, the transaction disclosure in this proposal has an 
annuity-specific disclosure requirement that would apply to 
recommendations of all Fixed Annuity Contracts. A new proposed Section 
III(a)(1) would require the Financial Institution to provide a 
transaction disclosure in accordance with the most recent Annuity 
Disclosure Model Regulation published by the National Association of 
Insurance Commissioners (NAIC) or its successor.\42\ Broadly, the 2015 
Annuity Disclosure Model Regulation requires the disclosure of 
information regarding the contract, including, among other items: (i) 
Value reductions caused by withdrawals or surrenders; (ii) the 
guaranteed and non-guaranteed elements of the Fixed Annuity Contract 
and their limitations, including, for fixed indexed annuities, the 
elements used to determine the index-based interest, such as the 
participation rates, caps or spreads, and an explanation of how they 
operate; (iii) an explanation of the initial crediting rate, or for 
fixed annuities, an explanation of how the index-based interest is 
determined; (iv) available periodic income options; (v) how values in 
the annuity contract can be accessed; (vi) the death benefit, if 
available; (vii) a summary of the federal tax status; (viii) the impact 
of any riders; and (ix) a list of charges and fees and how they apply.
---------------------------------------------------------------------------

    \42\ Annuity Disclosure Model Regulation, National Association 
of Insurance Commissioners (2015), available at http://www.naic.org/store/free/MDL-245.pdf.
---------------------------------------------------------------------------

    Under the proposal, both the Adviser and the Retirement Investor 
must sign the disclosure after the Adviser orally reviews the 
information. The aim of this disclosure is to ensure that Retirement 
Investors are informed of the risks and features of annuity products 
prior to entering into the annuity contract. This disclosure would be 
required prior to the transmittal of the annuity application to the 
insurance company and would be required to be made in connection with 
any recommendations to make additional deposits into the contract. The 
Department understands that in some cases, insurance companies 
currently provide an advance disclosure document, commonly referred to 
as a ``statement of understanding.'' This condition of the exemption 
would be satisfied if the required information is provided in a 
``statement of understanding'' in accordance with the applicable time 
frames specified in the condition. So long as the disclosure is 
delivered in a document that is distinct from the annuity contract, 
whether through a ``statement of understanding'' or otherwise the 
disclosure will satisfy the condition.
    The Department requests comment on the proposed disclosure 
condition. Does the Annuity Disclosure Model Regulation require the 
information commenters believe is appropriate and necessary in 
transactions involving

[[Page 7352]]

Fixed Annuity Contracts sold pursuant to the exemption? Should the 
final exemption require disclosure of any additional information? In 
particular, with respect to fixed indexed annuity contracts, should the 
exemption require an illustration designed to convey the difference 
between the performance of the applicable index or indices and the 
amount credited to the customer's annuity, in light of the indexing 
features such as the participation rate; any spread, margin or asset 
fees; interest rate caps or floors; and the recognition of dividends. 
For example, should the exemption require that Financial Institutions 
provide a chart illustrating prior annual returns of an index for a 
certain number of years compared to the amounts that would have been 
credited annually under the terms of the indexed annuity contract? If 
commenters believe such a disclosure would be desirable, the Department 
requests comment on how it should be operationalized.
    Section III(b) requires web-based disclosure that is intended to 
provide information about the Financial Institutions' arrangements with 
product manufacturers and other parties for Third Party Payments in 
connection with specific investments or classes of investments that are 
recommended to Retirement Investors, a description of the Financial 
Institution's business model and its compensation and incentive 
arrangements with Advisers and a copy of the Financial Institution's 
most recent audited financial statements as required pursuant to 
Section VIII(d)(2). Other than the disclosure of the audited financial 
statements, this provision is generally otherwise unchanged from the 
Best Interest Contract Exemption, except that certain provisions are 
revised in minor ways to account for the fact that the exemption will 
provide relief only for Fixed Annuity Contracts.
    The Department requests comment on the proposed requirement to 
maintain a copy of the Financial Institution's most recent audited 
financial statements on the Web site.

Section IV

    Section IV of the proposal relates to Financial Institutions that 
limit Advisers' investment recommendations, in whole or in part, based 
on whether the investments are Proprietary Products (as defined in 
Section VIII(j)) or to investments that generate Third Party Payments 
(as defined in Section VIII(n)). For purposes of this proposal, Section 
IV would apply to all Financial Institutions relying on the exemption 
because insurance intermediaries sell only investments that generate 
Third Party Payments (from the insurance company). Among other things, 
Section IV requires Financial Institutions to document the limitations 
they place on their Advisers' investment recommendations, the material 
conflicts of interest associated with proprietary or third party 
arrangements, and the services that will be provided both to Retirement 
Investors as well as third parties in exchange for payments. Such 
Financial Institutions must then reasonably conclude that the 
limitations will not cause the Financial Institution or its Advisers to 
receive compensation in excess of reasonable compensation, and, after 
consideration of their policies and procedures, reasonably determine 
that the limitations and associated conflicts of interest will not 
cause the Financial Institution or its Advisers to recommend imprudent 
investments. Financial Institutions must document the bases for their 
conclusions in these respects and retain the documentation pursuant to 
the recordkeeping requirements of the exemption, for examination upon 
request by the Department and other parties set forth in that 
section.\43\
---------------------------------------------------------------------------

    \43\ See Section IV(b)(3).
---------------------------------------------------------------------------

Sections V, VI and VII

    Section V of the proposed exemption would establish record 
retention and disclosure conditions that a Financial Institution must 
satisfy for the exemption to be available for compensation received in 
connection with recommended transactions. This provision is unchanged 
from the Best Interest Contract Exemption.
    Sections VI and VII propose supplemental exemptions. Section VI 
would apply to certain prohibited transactions commonly associated with 
annuity purchases but which are not covered by Section I. Section I 
permits Advisers and Financial Institutions to receive compensation 
that would otherwise be prohibited by the self-dealing and conflicts of 
interest provisions of ERISA section 406(a)(1)(D) and 406(b), and Code 
section 4975(c)(1)(D)-(F). However, Section I does not extend to any 
other prohibited transaction sections of ERISA and the Code. ERISA 
section 406(a) and Code section 4975(c)(1)(A)-(D) contain additional 
prohibitions on certain specific transactions between plans and IRAs 
and ``parties in interest'' and ``disqualified persons,'' including 
service providers. These additional prohibited transactions include: 
(i) The purchase of a Fixed Annuity Contract by a plan/IRA from a party 
in interest/disqualified person, and (ii) the transfer of plan/IRA 
assets to a party in interest/disqualified person. These prohibited 
transactions are subject to excise tax and personal liability for the 
fiduciary.
    Section VII proposes an exemption for pre-existing transactions 
involving Fixed Annuity Contracts. The exemption permits continued 
receipt of compensation based on transactions involving Fixed Annuity 
Contacts that occurred prior to the Applicability Date, as defined in 
Section VII(a), as well as the receipt of compensation for 
recommendations to continue to adhere to a systematic purchase program 
established before the Applicability Date. In this case, the Department 
anticipates that a systematic purchase program would involve a program 
in which a Retirement Investor would make regular, pre-scheduled 
contributions to an annuity contract; however, the Department requests 
comment on whether such relief is necessary or appropriate. The 
exemption also explicitly covers compensation received as a result of a 
recommendation to hold an annuity contract that was purchased prior to 
the Applicability Date but would not cover recommendations to exchange 
an annuity for another annuity. In addition, a few references to 
securities that are found in the Best Interest Contract Exemption were 
deleted from this exemption because it would not provide relief for 
securities transactions.
    This preamble discussion focused on conditions in this proposal 
that differ from the Best Interest Contract Exemption. The preamble to 
the Best Interest Contract Exemption includes a lengthy and in-depth 
discussion of the remaining conditions, which is incorporated into this 
preamble by reference. Because of the significant length of that 
discussion, the Department did not repeat it in this document, but 
rather directs parties to the Best Interest Contract Exemption preamble 
for a more complete description of the scope, definitional terms, and 
conditions of the exemption.\44\
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    \44\ 81 FR 21002 (April 8, 2016).
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Transition Relief

    Section IX of the proposal provides for a transition period, from 
April 10, 2017, to August 15, 2018, under which fewer conditions would 
apply. During the transition period, the Financial Institution and its 
Advisers would be required to satisfy the conditions of Section IX(d) 
of the proposal. Prior to receiving compensation in reliance on the 
exemption, Financial Institutions would be required under Section IX(d)

[[Page 7353]]

to notify the Department of their intention to rely on the exemption 
and make a specific representation to the Department regarding their 
active engagement in creating systems and safeguards to satisfy the 
conditions applicable to the relief in Section I, following the 
transition period. The proposed required representation is: ``[Name of 
Financial Institution] is presently taking steps to put in place the 
systems necessary to comply with Section I of the Best Interest 
Contract Exemption for Insurance Intermediaries, and fully intends to 
comply with all applicable conditions for such relief after the 
expiration of the transition period.'' The Department proposed a 
transition period to give Financial Institutions under the proposed 
exemption time to comply with all the exemption's conditions, and the 
Department anticipates that parties relying on the transition period 
should be developing an approach to full compliance during the 
transition period.
    During the transition period, the Adviser and Financial Institution 
must comply with the Impartial Conduct Standards. Additionally, the 
Financial Institution would be required to comply with applicable 
disclosure obligations under state insurance law with respect to the 
sale of the Fixed Annuity Contract, and certain additional disclosures 
would be required, including an acknowledgment of the Adviser's and 
Financial Institution's fiduciary status; a description of their 
material conflicts of interest; and a disclosure of whether they offer 
proprietary products or products that generate third party payments and 
the extent to which they limit investment recommendations on those 
bases. The Financial Institution would have to approve all written 
marketing materials used by Advisers, as described in Section II(d)(4). 
The Financial Institution would have to designate a person responsible 
for addressing material conflicts of interest and monitoring Advisers' 
adherence to the Impartial Conduct Standards, and such person would be 
required to approve, in writing, recommended annuity applications 
involving Retirement Investors prior to transmitting them to the 
insurance company. Finally, the Financial Institution would have to 
comply with the recordkeeping requirements of Section V(b) and (c).
    It is proposed that, starting on August 16, 2018, parties intending 
to rely on the exemption must comply with all of the applicable 
conditions in Sections II-V.

No Relief Proposed From ERISA Section 406(a)(1)(C) or Code Section 
4975(c)(1)(C) for the Provision of Services

    This proposed exemption would not provide relief from a transaction 
prohibited by ERISA section 406(a)(1)(C), or from the taxes imposed by 
Code section 4975(a) and (b) by reason of Code section 4975(c)(1)(C), 
regarding the furnishing of goods, services or facilities between a 
plan and a party in interest. The provision of investment advice to a 
plan under a contract with a plan fiduciary is a service to the plan 
and compliance with this exemption will not relieve an Adviser or 
Financial Institution of the need to comply with ERISA section 
408(b)(2), Code section 4975(d)(2), and applicable regulations 
thereunder.

Regulatory Impact Analysis

Executive Order 12866 and 13563 Statement

    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 
OMB. Section 3(f) of Executive Order 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 Executive Order 12866, OMB has tentatively 
determined that this proposed action is economically significant within 
the meaning of section 3(f)(1) of the Executive Order. Accordingly, OMB 
has reviewed the proposed prohibited transaction class exemption and 
the Department provides the following assessment of its impact.

Background of Proposed Exemption

    As discussed earlier in this preamble, the prohibited transaction 
rules of ERISA and the Code prohibit employee benefit plan and 
individual retirement account (IRA) fiduciaries from receiving indirect 
or variable compensation as a result of their investment advice to the 
plans and IRAs. The exemption proposed in this document would allow 
certain insurance intermediaries, and the insurance agents and 
insurance companies with whom they contract, to receive compensation in 
connection with certain fixed annuity transactions that may otherwise 
give rise to prohibited transactions as a result of the provision of 
investment advice to plan participants and beneficiaries, IRA owners 
and certain plan fiduciaries. The proposed class exemption includes 
protective conditions, similar to those contained in the Department's 
Best Interest Contract Exemption (PTE 2016-01) granted on April 8, 
2016,\45\ that are designed to safeguard the interests of plans, 
participants and beneficiaries, and IRA investors and ensure that they 
receive investment advice that is in their best interest.
---------------------------------------------------------------------------

    \45\ 81 FR 21002 (April 8, 2016) as corrected at 81 FR 44773 
(July 11, 2016).
---------------------------------------------------------------------------

    The Best Interest Contract Exemption is available only to certain 
Financial Institutions that are subject to well-established regulatory 
conditions and oversight, namely banks, investment advisers registered 
under the Investment Advisers Act of 1940 or state law, broker-dealers, 
and insurance companies. However, the exemption provides a mechanism 
that would make it more broadly available to other entities that are 
described in the definition of Financial Institution in an individual 
prohibited transaction exemption providing relief under the same 
conditions as in the Best Interest Contract Exemption. Thus, if an 
individual exemption is granted, other entities that satisfy the 
applicable

[[Page 7354]]

conditions could rely on the Best Interest Contract Exemption.\46\
---------------------------------------------------------------------------

    \46\ In the preamble to the Best Interest Contract Exemption, 
the Department stated that ``[i]f parties wish to expand the 
definition of Financial Institution to include marketing 
intermediaries or other entities, they can submit an application to 
the Department for an individual exemption, with information 
regarding their role in the distribution of financial products, the 
regulatory oversight of such entities, and their ability to 
effectively supervise individual [a]dvisers' compliance with the 
terms of this exemption. See 81 FR at 21067.
---------------------------------------------------------------------------

    In response to this provision, the Department received 22 
individual exemption applications from insurance intermediaries that 
work with independent insurance agents to sell fixed annuity products 
(``applicants''). The applicants describe themselves as ``independent 
marketing organizations,'' ``insurance marketing organizations'' and 
``field marketing organizations'' among other names. Collectively, the 
Department refers to the applicants and similar entities as ``IMOs'' in 
this analysis. The applicants sought individual exemptions under the 
same conditions as the Best Interest Contract Exemption, but with a new 
definition of ``Financial Institution'' incorporating insurance 
intermediaries.
    Because of the large number and similar characteristics of the 
applicants, the Department decided that instead of utilizing the 
individual exemption process described in the Best Interest Contract 
Exemption, it would propose, on its own motion, a class exemption for 
IMOs based on the facts and representations provided in the individual 
exemption applications received by the Department. As discussed more 
fully below, the Department believes this is the most efficient way to 
provide relief to IMOs from the prohibited transaction rules of ERISA 
and the Code so long as they meet the protective conditions of the 
exemption that would safeguard the interests of affected plans, 
participants and beneficiaries, and IRA owners. Accordingly, the 
Department today is proposing a class exemption that would allow IMOs 
and associated independent insurance agents to continue to recommend 
fixed annuities in the Retirement Investor marketplace and receive 
commissions and other variable compensation.

Background Regarding Fixed-Indexed Annuities and IMOs

Fixed-Indexed Annuities (FIA) and Their Distribution Channel \47\
---------------------------------------------------------------------------

    \47\ The statistics presented here are for all FIAs, and not 
just FIAs sold to or held in IRAs.
---------------------------------------------------------------------------

    As discussed in detail in in section 3.2 of the Regulatory Impact 
Analysis for the Regulation,\48\ unlike fixed rate annuities where an 
insurer agrees to credit no less than a specified rate of interest 
during the time that the account value is growing, fixed-indexed 
annuities (FIAs) are annuity contracts whose return is based on the 
performance of a specified market index. Traditionally, common indexes 
used in FIAs are equity indexes such as the S&P 500 or Dow Jones 
Industrial Average. Although the S&P 500 is still the most often used 
index, various alternative indexes--including gold and a hybrid derived 
from one or more other indexes--have gained market share.\49\
---------------------------------------------------------------------------

    \48\ The RIA is available at www.dol.gov/ebsa.
    \49\ LIMRA U.S. Individual Annuity Yearbook--2015.
---------------------------------------------------------------------------

    Insurers generally guarantee FIA contract holders at least a zero 
return. However, the actual return on a FIA is not determined until the 
end of the crediting period and is based on the performance of the 
index or other external reference.
    Similar to variable annuities, the returns of fixed-indexed 
annuities can vary widely, which results in a risk to investors. 
Furthermore, insurers generally reserve rights to change participation 
rates, interest caps, and fees, which can limit the investor's exposure 
to the upside of the market and effectively transfer investment risks 
from insurers to investors.
    In 2015, FIA sales totaled a record high $54.5 billion, which 
represents a 13% increase from sales of $48.2 billion in 2014.\50\ This 
upward trend in FIA sales continued in 2016. In the first-half of 2016, 
FIA sales increased by 32% to $31.9 billion compared to the same period 
in 2015.\51\ FIA sales are projected to exceed $64 billion by the end 
of 2016 according to LIMRA Secure Retirement Institute.\52\
---------------------------------------------------------------------------

    \50\ LIMRA U.S. Individual Annuity Sales--Fixed annuity 
breakout, 2015 Year-end Results http://www.limra.com/uploadedFiles/limra.com/LIMRA_Root/Posts/PR/_Media/PDFs/2015-Top-20-Fixed-Breakout.pdf.
    \51\ LifeHealthPro Editors, August 16, 2016, ``Fixed indexed 
annuities break quarterly sales record'' Available at http://www.lifehealthpro.com/2016/08/16/fixed-indexed-annuities-break-quarterly-sales-reco?slreturn=1476799732.
    \52\ LIMRA Individual Annuity Yearbook 2015.
---------------------------------------------------------------------------

    Table 1 shows the shares of FIA sales by distribution channel for 
2008-2015. In 2015, approximately 63% of FIAs, $34.1 billion, were sold 
through the independent agent distribution channel.\53\ FIA sales 
through banks and broker-dealers (BDs) have been trending upward over 
time. In 2008, only 4% of FIAs were sold through banks and 2% were sold 
through independent BDs. By 2015, FIA sales by banks had steadily grown 
to 16% and sales by independent BDs had also grown to 12% of total FIA 
sales. In contrast, the share of FIA sales by independent agents has 
declined. For example, in 2008, 88% of FIAs were sold by independent 
agents; however by 2015 their share of FIA sales had decreased to 63%.
---------------------------------------------------------------------------

    \53\ DOL's own calculations based on LIMRA U.S. Individual 
Annuity Yearbook 2014.

                                   Table 1--Share of Fixed Indexed Annuity Sales by Distribution Channel (%) 2008-2015
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                   2008  (%)    2009  (%)    2010  (%)    2011  (%)    2012  (%)    2013  (%)    2014  (%)    2015  (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Independent Agents..............................           88           84           85           86           81           77           66           63
Banks...........................................            4            7            7            6            9           13           14           16
Independent BD..................................            2            3            2            2            3            5           13           12
Career Agents...................................            6            6            6            5            6            4            5            6
Full Service National BD........................            0            0            0            0            1            1            2            3
                                                 -------------------------------------------------------------------------------------------------------
    Total.......................................          100          100          100          100          100          100          100          100
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: LIMRA Individual Annuity Yearbook 2008-2015.


[[Page 7355]]

Role of IMOs in Distributing Insurance Products and Market Structure

    As discussed earlier in this preamble, the main function of IMOs is 
to market, distribute and wholesale various insurance products.\54\ 
This intermediary structure is appealing to both insurance carriers 
(insurers) and independent insurance producers (insurance agents) 
because it allows insurers to reduce their overhead costs while 
facilitating the sale of the products by independent insurance agents, 
as opposed to their captive insurance agent counterparts.\55\
---------------------------------------------------------------------------

    \54\ Joe Simonds, ``Warning: Why FMOs will be extinct soon,'' 
Lifehealthpro (Dec. 5, 2012); available at: http://www.lifehealthpro.com/2012/12/05/warning-why-fmos-will-be-extinct-soon.
    \55\ Ibid.
---------------------------------------------------------------------------

    There is no centralized database containing information identifying 
all existing IMOs in the U.S., because IMOs are licensed as insurance 
agents or agencies in each state where they operate. Therefore, it is 
difficult to reliably estimate how many IMOs currently exist in the 
U.S. Some evidence indicates that the number of IMOs could be in the 
hundreds,\56\ or, more specifically, as many as 350.\57\ Regardless of 
the total number, one industry observer reported that the top 20 IMOs 
conduct the lion's share of the business.\58\ Many large IMOs, such as 
Annexus, Legacy Marketing Group and Market Synergy Group act as 
intermediaries between insurers and multiple small IMOs, and therefore, 
are referred to as Super-IMOs, or IMO aggregators. One media report 
additionally identifies M&O Marketing, InsurMark and Advisors Excel as 
other large IMOs.\59\ In 2015, Annexus alone reported approximately $4 
billion in FIA sales representing approximately 7% of total FIA sales 
\60\ and comprising a network of 17 IMOs. Legacy Marketing Group, Inc. 
contracted with approximately 200 IMOs, and actively conducts business 
with 50 to 60.\61\ Market Synergy reported $15 billion in fixed-indexed 
sales collectively and consisted of 11 sub-IMOs.\62\ This information 
suggests that the IMO market has a complex hierarchical structure.
---------------------------------------------------------------------------

    \56\ Cyril Tuohy, June 10, 2016, Insurancenewsnet.com 
``Insurance Marketing Organizations Feel The DOL's Freezer Burn'' 
Available at http://insurancenewsnet.com/innarticle/wholesalers-mull-future.
    \57\ Warren Hersch, August 12, 2016, LifeHealthPro.com 
``Unchartered waters: Why this IMO is seeking FI status under DOL 
rule.'' Available at http://www.lifehealthpro.com/2016/08/12/unchartered-waters-why-this-imo-is-seeking-fi-stat Arthur Postal, 
August 10, 2016 LifeHealthPro.com ``IMOs take on enhanced sales role 
under the new DOL rule'' available at http://www.lifehealthpro.com/2016/08/10/imos-take-on-enhanced-sales-role-under-the-new-dol?ref=related-embedded.
    \58\ Cyril Tuohy, June 10, 2016, Insurancenewsnet.com 
``Insurance Marketing Organizations Feel The DOL's Freezer Burn'' 
Available at http://insurancenewsnet.com/innarticle/wholesalers-mull-future.
    \59\ Cyril Tuohy, June 10, 2016, Insurancenewsnet.com 
``Insurance Marketing Organizations Feel The DOL's Freezer Burn'' 
Available at http://insurancenewsnet.com/innarticle/wholesalers-mull-future.
    \60\ Greg Iacurci, June 23, 2016, Investment News, ``Indexed 
annuity distributors weigh launching B-Ds due to DOL fiduciary 
rule'' available at http://www.investmentnews.com/article/20160623/FREE/160629957/indexed-annuity-distributors-weigh-launching-b-ds-due-to-dol.
    \61\ Warren Hersch, September 16, 2016, ``Not ready to become a 
DOL compliance FI? Go partner with one'' Available at http://www.lifehealthpro.com/2016/09/16/not-ready-to-become-a-dol-compliant-fi-go-partner?t=diversity-market.
    \62\ See Market Synergy Preliminary Injunction Memo filed June 
17, 2016, in the United States District Court for the District of 
Kansas.
---------------------------------------------------------------------------

Common Characteristics of IMO Individual Exemption Applicants \63\
---------------------------------------------------------------------------

    \63\ In some cases, the information presented here is supported 
by sources beyond the applications, but in all cases the information 
is consistent with information provided in the applications.
---------------------------------------------------------------------------

    As discussed earlier in this preamble, the Department has studied 
the characteristics of IMOs that applied for the individual exemptions. 
The applications indicate that most IMOs applicants have been in 
business for 25 to 40 years and operate in all 50 states. For example, 
one IMO applicant has over 600 offices across 50 states.\64\ IMO 
applicants tend to be large: Almost all IMO applicants were identified 
as Super-IMOs or larger IMOs by industry trade press. Of those 
applicant IMOs that disclosed their sales information, all indicated 
sales of more than $1.5 billion in 2015, and two IMOs reported FIA 
sales of from $4-5 billion in 2015.\65\ Other IMOs reported from $2-3 
billion of annual fixed annuity sales. These data suggest that IMO 
applicants generate FIA sales equivalent to the FIA sales of some 
insurance companies. In 2015, FIA sales of the top 10 FIA issuers by 
sales ranged from $8.7 billion (Allianz Life of North America) to $1.8 
billion (Security Benefit Life).\66\
---------------------------------------------------------------------------

    \64\ Individual Exemption Application of Advisors Excel.
    \65\ Advisors Excel and Annexus reported $5 billion and $ 4 
billion sales in FIAs respectfully according to the their individual 
exemption applications and Annexus reported $4 billion sales in the 
article by Greg Iacurci, June 23, 2016, Investment News, ``Indexed 
Annuity Distributors Weigh Launching B-Ds Due to DOL Fiduciary 
Rule'' available at http://www.investmentnews.com/article/20160623/FREE/160629957/indexed-annuity-distributors-weigh-launching-b-ds-due-to-dol.
    \66\ LIMRA Individual Annuity Yearbook 2015.
---------------------------------------------------------------------------

    Most applicant IMOs partner with between 20 and 75 insurers. One 
IMO indicated that it conducts business with nine out of the top 10 
insurers offering FIAs.\67\ Many of the applicants state that they have 
direct contractual relationships with the majority of the insurers for 
whom they distribute fixed annuities. Frequently, these direct 
contractual relationships include recognition that the applicants are 
contractually responsible for the oversight of agents and sub-IMOs. 
This oversight is accomplished through applying the top-level IMO's use 
of its compliance structure and other business and administrative 
tools. The applicants use their compliance structure to directly 
oversee agents or they use those same tools to assist sub-IMOs in the 
distribution of fixed annuities and the oversight of their agents.
---------------------------------------------------------------------------

    \67\ Individual Exemption Application submitted by Advisors 
Excel.
---------------------------------------------------------------------------

    Sub-IMOs have contractual relationships with the insurers for whom 
they distribute fixed annuities, and they also have contractual 
relationships with top-level IMOs. Top-level IMOs generally provide 
their related sub-IMOs with distribution and other support services. 
Top-level IMOs often assist these sub-IMOs in accessing a wide variety 
of insurance products. Sub-IMOs contract with top-level IMOs to obtain 
this access, and these services allow some sub-IMOs to focus on the 
training and support of their agents.
    Some applicants, in addition to describing themselves as top-level 
IMOs, also represented that they are affiliated with large insurers. 
One of these applicants, in turn, wholly owns numerous sub-IMOs. 
Despite the differences in the ownership structure, these applicants 
represent that they, like the other top-level IMOs, assist in the 
distribution of fixed annuities, both for their affiliates and for 
other insurers, and provide valuable business and administrative 
assistance to sub-IMOs and agents.
    The number of smaller IMOs or sub-IMOs that larger IMOs conduct 
business with varies widely, but most applicant IMOs that disclosed 
this information in their applications state that they conduct business 
with between 7 and 35 sub-IMOs. Two IMO applicants indicate that they 
work with over 100 other IMOs.\68\ However, not all affiliated sub-

[[Page 7356]]

IMOs generate sales on a regular basis.\69\ Several IMO applicants 
indicate that they work with approximately 2,000 to 4,000 agents and 
others report that they have approximately 120,000 to 200,000 
affiliated agents nationwide. However, according to some IMO 
applicants, only approximately 20% to 30% of the large number of 
contracted agents generates sales through them on a regular basis.\70\ 
These independent agents can work with multiple IMOs. However, two IMOs 
indicated that they work with an exclusive group of affiliated agents 
or employee agents that are selected after undergoing a rigorous 
screening process.\71\ The applications indicate that most IMOs 
currently not maintaining exclusive business relationships with 
independent agents would require independent agents to exclusively 
process FIA sales through them if the proposed exemption were granted.
---------------------------------------------------------------------------

    \68\ Warren Hersch, September 7, 2016, LifeHealthPro, ``Eye on 
the Future: Futurity First Readies Advisors for DOL Rule'' Available 
at http://www.lifehealthpro.com/2016/09/07/eye-on-the-future-futurity-first-readies-advisors. Warren Hersch, September 16, 2016, 
``Not Ready to Become a DOL Compliance FI? Go partner with One'' 
Available at http://www.lifehealthpro.com/2016/09/16/not-ready-to-become-a-dol-compliant-fi-go-partner?t=diversity-market.
    \69\ Warren Hersch, September 16, 2016, ``Not Ready to become a 
DOL Compliance FI? Go Partner with One'' Available at http://www.lifehealthpro.com/2016/09/16/not-ready-to-become-a-dol-compliant-fi-go-partner?t=diversity-market.
    \70\ Individual Exemption Applications of M&O Financial, 
Application of ECA Marketing and Warren Hersch, September 16, 2016, 
``Not Ready to Become a DOL Compliance FI? Go Partner with One'' 
Available at http://www.lifehealthpro.com/2016/09/16/not-ready-to-become-a-dol-compliant-fi-go-partner?t=diversity-market.
    \71\ Individual Exemption Application of Saybrus Partners, Inc. 
and Warren Hersch, August 12, 2016, LifeHealthPro.com ``Unchartered 
Waters: Why This IMO is Seeking FI Status under DOL Rule.'' 
Available at http://www.lifehealthpro.com/2016/08/12/unchartered-waters-why-this-imo-is-seeking-fi-stat.
---------------------------------------------------------------------------

    Several IMO applicants are affiliated with BDs and/or registered 
investment advisers (RIAs). Moreover, some of the IMOs that currently 
are not affiliated with BDs or RIAs reported that they are developing a 
BD,\72\ or have a subsidiary that is in the process of becoming a 
RIA.\73\ One IMO stated that is has partnered with nearly 20 BDs and 
provided extensive training and mentoring to registered representatives 
regarding selling FIAs.\74\ Two IMOs also stated that they have an 
affiliated IT firm or proprietary technology platform that will help 
them comply with the exemption.
---------------------------------------------------------------------------

    \72\ Greg Iacurci, June 23, 2016, Investment News, ``Indexed 
Annuity Distributors Weigh Launching B-Ds Due to DOL Fiduciary 
Rule'' available at http://www.investmentnews.com/article/20160623/FREE/160629957/indexed-annuity-distributors-weigh-launching-b-ds-due-to-dol.
    \73\ Cyril Tuohy, August 9, 2016, insurancenewsnet.com 
``AmeriLife Files for FI Status Under DOL Fiduciary Rule'' Available 
at http://insurancenewsnet.com/innarticle/amerilife-files-fi-status-dol-fiduciary-rule.
    \74\ Individual Exemption Application of InsurMark.
---------------------------------------------------------------------------

    The applicants represented to the Department that they have 
experience in a variety of areas that will contribute to their ability 
to satisfy the conditions of the Best Interest Contract Exemption. Some 
applicants pointed to direct experience providing oversight of 
independent agents for insurance law compliance, while some indicated 
that they planned to rely on affiliated RIAs and/or BD entities in 
developing systems to comply with the exemption. The cost of developing 
a new compliance platform often represents a large share of total 
compliance costs. Thus, if an IMO does not have to develop a new 
system, it would save costs significantly for itself and the insurance 
industry as a whole would save significant costs if other IMOs were 
similarly positioned. In addition, IMOs with affiliated BDs and/or RIAs 
can draw from the supervisory experience of BDs and RIAs regarding 
properly training, monitoring, and not inappropriately incentivizing 
agents and even share personnel with them. They also can use disclosure 
forms similar to their affiliated BDs and/or RIAs.
    The applicants generally indicated they would maintain internal 
compliance departments and adopt supervisory structures to ensure 
compliance with the exemption. Several applicants pointed to technology 
that would be used in ensuring compliance. Some applicants indicated 
that insurance agents would be required to use their technology to 
ensure clients receive disclosures and a contract, where required. 
Agents would also be required to use the IMO's Web site services and 
maintain records centrally.
    Some applicants additionally described how their sales practices 
would ensure best interest recommendations. A number of the applicants 
specifically proposed to require centralized approval of agent 
recommendations; in some cases, the recommendations would be reviewed 
by salaried employees of the IMO with additional credentials, such as 
Certified Financial Planners. One applicant indicated that internal 
review would include a comparison of the proposed product to other 
similar fixed indexed annuity products available in the marketplace to 
ensure it is appropriate for the purchaser, and that the analysis would 
include utilizing third-party benchmarking services and industry 
comparisons. Another applicant indicated that it would ensure that a 
RIA representative would work with insurance-only agents when a 
recommendation would involve the liquidation of securities to ensure 
that both state and federal securities laws are properly followed.
    Some applicants additionally stated that their contracts with 
insurance agents would include certain specific requirements, 
including: Adherence to the IMO's policies and procedures with respect 
to advertising, market conduct and point of sale processes, 
transparency and documentation; provision of advice in accordance with 
practices developed by the IMO; and agreement that the agents will not 
accept any direct or indirect compensation from an insurance company, 
except as specifically approved by the IMO. A number of the applicants 
indicated that they would perform background checks and rigorous 
selection processes before working with agents and would require agents 
to receive ongoing training regarding compliance with the exemption.
    A few of the applicants addressed product selection. These 
applicants indicated that agents making recommendations pursuant to the 
exemption would be limited to certain products and insurance companies. 
The applicants indicated there would be ongoing due diligence with 
respect to insurance companies and product offerings under the 
exemption.
    Based on information contained in the submitted applications, some 
qualified and willing IMOs might be able to perform compliance 
responsibilities more cost effectively than some insurance companies. 
Many IMO applicants indicate that they have affiliated BDs or RIAs, and 
these IMOs have several advantages in managing compliance costs: They 
can utilize compliance platforms already developed and implemented for 
BDs and/or RIAs with some necessary adjustments. This would allow large 
IMOs to save some large start-up fixed costs to develop a new system.
    The applications also indicate that some IMOs already have many of 
the capacities and much of the infrastructure in place that would be 
necessary to carry out compliance responsibilities required by the 
exemption, and thus might incur only relatively small, incremental 
costs to comply with the exemption conditions.
    The Department cautions that although its careful review of 
individual exemption applications reveals that many applicant IMOs 
share the common characteristics discussed above, the Department is 
uncertain regarding the extent to which these characteristics can be 
generalized to the overall IMO market. The Department welcomes comments 
regarding whether these common characteristics can be extrapolated to 
the broader IMO market

[[Page 7357]]

or whether they are distinctive and unique to the IMO applicants.

Impact of Proposed Class Exemption

    As discussed earlier in this preamble, IMOs are not included within 
the Financial Institution definition under the Best Interest Contract 
Exemption. Instead, the exemption provides a mechanism under which the 
definition can be expanded if an individual exemption is granted to 
another type of entity. In that event, the individual exemption would 
provide relief to the applicants identified in the exemption, but the 
definition of Financial Institution in the Best Interest Contract 
Exemption would be expanded so that other entities that satisfy the 
definition in the individual exemption could rely on the Best Interest 
Contract Exemption. The Department received 22 applications for 
individual exemptions from IMOs that work with independent insurance 
agents to sell fixed annuity products. Because of the large number of 
applications, the Department determined to propose, on its own motion, 
a class exemption for such intermediaries based on the facts and 
representations in the individual applications received by the 
Department.
    The following discussion assesses the impact of this class 
exemption relative to the baseline associated with the aforementioned 
provision of the Best Interest Contract Exemption. Under this baseline 
scenario, the Department would have granted individual exemptions to 
one of more of the applicants. The specific contours of this baseline 
are necessarily hypothetical, because at this time the Department has 
neither granted nor proposed any such individual exemptions. For 
purposes of this assessment, the Department assumes that any such 
individual exemptions would have included all of the same conditions 
included in this class exemption, and made available the same exemptive 
relief to the same market participants. This assumption is reasonable 
insofar as at this time the Department has not reached a tentative 
finding with respect to any particular applicant that an exemption with 
fewer or different conditions would be beneficial to IRA investors and 
protective of their rights as is required before the Department grants 
an exemption.
    Given this assumption that the scope and conditions of this class 
exemption are substantively the same as those associated with the 
appropriate baseline, it follows that the impact of this class 
exemption relative to the baseline is likely to be limited to the 
procedural differences between the class and individual exemption 
procedures. With the exception of these procedural differences, under 
both the proposed class exemption and the baseline scenario, the same 
market participants would chiefly pursue the same courses of action and 
achieve the same results. However, notwithstanding the substantive 
equivalence of the proposed class exemption and the baseline, it is 
possible that some market participants would perceive substantive 
differences, and make different decisions with different results. The 
Department invites comments these or any other potential substantive 
impact of this proposed class exemption relative to the baseline 
scenario.
    This proposed class exemption would extend to IMOs that satisfy its 
conditions relief that is similar to that for Financial Institutions 
under the Best Interest Contract Exemption. The Department anticipates 
that, like the Best Interest Contract Exemption, this proposed 
exemption will deliver benefits that justify its costs.\75\
---------------------------------------------------------------------------

    \75\ The Department provides a detailed discussion of the cost 
and benefits associated with the Best Interest Contract Exemption in 
its regulatory impact analysis for the Regulation and exemptions, 
which was published on the Department's Web site at the same time 
that the Regulation and exemptions were published in the Federal 
Register and is available at https://www.dol.gov/ebsa/pdf/conflict-of-interest-ria.pdf.
---------------------------------------------------------------------------

    In issuing the Regulation and Best Interest Contract Exemption, the 
Department noted that compliance might be more burdensome for some 
industry segments than for others, that some insurers and some 
independent insurance agents might be among those needing to make more 
significant changes, and that this could impose some costs on affected 
Retirement Investors.
    This proposed class exemption offers affected insurers, agents, and 
IMOs an alternative path to compliance that in some cases is likely to 
prove more economically efficient than existing paths. The applications 
that prompted this proposal support the premise that many IMOs have, or 
can affordably develop, the capacity to perform the functions required 
of Financial Institutions. In particular, some IMOs' positions as 
intermediaries between multiple insurers and multiple independent 
agents may be advantageous for purposes of mitigating agents' conflicts 
and ensuring that their recommendations are loyal to their customers' 
interests.
    Under the proposed class exemption, market forces will favor 
migration of these functions to the entities that can perform them most 
efficiently. To the extent that IMOs take advantage of relief under 
this proposed exemption to shoulder these responsibilities, insurers 
may be relieved of what would have been greater costs to perform the 
same functions. This would improve the efficiency of the market in 
which insurers, independent agents, and IMOs operate. Meanwhile, the 
conditions of this exemption aim to ensure that, like Financial 
Institutions under the Best Interest Contract Exemption, covered IMOs 
can be relied on to perform their role effectively. If IMOs and related 
independent agents sell their services and FIAs in efficiently 
competitive intermediate and consumer markets, then such efficiency 
would accrue mostly to Retirement Investors.
    The Department believes that the proposed class exemption will be 
more beneficial than would the individual exemption approach that is 
contemplated under the relevant provision of the Best Interest Contract 
Exemption. The Department believes that as a practical matter, the same 
rules could be established via either approach. That is, an individual 
exemption issued pursuant to the relevant provision of the Best 
Interest Contract Exemption could be crafted to make the intended 
relief available to any IMO that satisfied the same conditions as those 
included in this proposed class exemption. The Department believes, 
however, that the proposed class exemption offers the less costly route 
to the desired result. The cost advantage arises not from any 
difference in ongoing compliance costs, which generally would be the 
same. Rather the Department anticipates that the availability of the 
class exemption will obviate the need for some or all current and 
potential future applicants to pursue to completion an application for 
an individual exemption,\76\ and any attendant net procedural cost 
savings (relative to the baseline) would constitute benefits of this 
proposed class exemption. The Department invites comments on these 
potential net cost savings. In addition, although substantively the 
same as the baseline, by providing a single class exemption this 
proposal potentially will provide greater simplicity and clearer 
consistency, and a more clearly even playing field, than multiple 
individual exemptions might. Finally, relative to one or more 
individual exemptions, a class exemption may encourage more IMOs to 
accelerate their efforts to

[[Page 7358]]

optimize their competitive market positions.
---------------------------------------------------------------------------

    \76\ The Department's individual exemption procedure is 
described in 29 CFR 2570.30 through 2570.52.
---------------------------------------------------------------------------

    If the conditions of the exemption are satisfied, IMOs acting as 
Financial Institutions, and the independent agents and insurers they 
contract with, would be permitted to receive indirect and variable 
compensation in connection with recommendations of Fixed Annuity 
Contracts that would otherwise be prohibited as a result of the 
Regulation extending fiduciary status to many investment professionals 
who formerly were not treated as fiduciaries.\77\ This would provide 
IMOs with flexibility to maintain their current business model in a 
cost-effective way, as was contemplated under the relevant provision of 
the Best Interest Contract Exemption. The applicants represent that the 
independent insurance agent model benefits consumers, because 
independent agents are able to offer a wider variety of products to 
satisfy consumers' goals. The class exemption would allow IMOs to serve 
as Financial Institutions, which will allow independent insurance 
agents to continue to recommend fixed annuities in the Retirement 
Investor marketplace under a single set of policies and procedures.
---------------------------------------------------------------------------

    \77\ The proposed exemption would apply to commissions and other 
compensation received by an insurance agent, IMO insurance 
intermediary, insurance companies and any other affiliates and 
related entities, as a result of a plan's or IRA's purchase of Fixed 
Annuity Contracts.
---------------------------------------------------------------------------

    The Department expects that IMOs will determine whether to seek 
relief under this exemption's conditions based on their long-term 
strategic goals and will do so only if makes economic sense. IMOs that 
choose not to use the exemption, or that are unable to satisfy the 
conditions, may still play a role in the fixed annuity distribution 
channel by providing valuable compliance assistance and other services 
to insurance companies or other insurance intermediaries who act as 
Financial Institutions under the Best Interest Contract Exemption, or 
this exemption if granted, and receive compensation for their services.
    The proposed class exemption would require IMOs to structure 
compensation received for transactions involving Fixed Annuity 
Contracts in a way that mitigates conflicts of interests and does not 
improperly incentivize independent agents to sell one product over 
another.\78\ Furthermore, it requires IMOs to satisfy some additional 
conditions that do not apply to Financial Institutions using the Best 
Interest Contract Exemption such as (i) conducting annual audits of 
financial statements, (ii) providing an annuity-specific disclosure to 
Retirement Investors, and (iii) obtaining fiduciary liability insurance 
coverage or setting aside sufficient reserves to cover potential 
liability exposure.\79\
---------------------------------------------------------------------------

    \78\ Cyril Tuohy, August 9, 2016, insurancenewsnet.com ``6 IMOs 
Apply for `Financial Institution' Status Under DOL Rule,'' Available 
at http://insurancenewsnet.com/innarticle/six-imos-apply-for-dol-fi-status Cryil Tuohy, August 17, 2016, insurancenewsnet.com ``Allianz 
FMO Proposes FINRA-Style Oversight of Insurance Agents'' Available 
at http://insurancenewsnet.com/innarticle/fmo-proposes-finra-based-supervision-structure.
    \79\ There are several other additional conditions that would 
apply, such as: (i) The IMO must approve written marketing materials 
used by Advisers (Section II(d)(4)); (ii) the IMO's compliance 
officer designated pursuant to Section II(d)(2) must approve 
recommended annuity applications prior to their submission to the 
insurance company (Section II(d)(5)); (iii) the IMO must provide, 
and require Advisers to attend, annual training on compliance with 
the exemption (Section II(d)(8)), and IMOs must meet the requirement 
of Section IV, because they limit product recommendations based on 
third-party payments. For purposes of this analysis, the Department 
has focused its discussion in the regulatory impact analysis on the 
conditions that it believes would have the most significant impact.
---------------------------------------------------------------------------

    The Department considered the alternative of issuing the proposed 
class exemption without imposing additional conditions to those 
contained in the Best Interest Contract Exemption, but chose to propose 
these additional conditions to ensure that transactions involving 
recommendations for Retirement Investors to purchase FIAs that are sold 
by independent agents through IMOs occur only when they are in their 
clients' best interest. These protections respond to the Department's 
concern that IMOs are not subject to well-established regulatory 
conditions and oversight like those that apply to Financial 
Institutions eligible to act as Financial Institutions under the Best 
Interest Contract Exemption and concerns expressed by the SEC, FINRA, 
and North American Securities Administrators Administration regarding 
how FIAs have been designed and marketed. The conditions would provide 
additional protection to consumers to ensure that Retirement Investors 
are adequately protected from the deleterious effects of conflicts of 
interest. However, these additional conditions will impose some 
compliance burden on IMOs relying on the exemption. Due to data 
limitations, the Department only was able to quantify the incremental 
costs associated with additional annuity disclosure. The Department 
discusses the impact of these additional conditions below.
    Obtain Fiduciary Liability Insurance or Set Aside Reserves: One of 
the additional conditions requires IMOs to maintain fiduciary liability 
insurance, or cash, bonds, bank certificates of deposit, U.S. Treasury 
Obligations, or a combination of all of these, available to satisfy 
potential liability under ERISA or the Code as a result of this 
exemption. The aggregate amount of these items must equal at least 1% 
of the average annual amount of premium sales of Fixed Annuity Contract 
sales by the Financial Institution to Retirement Investors over the 
prior three fiscal years of the Financial Institution. For example, an 
IMO with average sales of $2 billion could satisfy this condition by 
setting aside $20 million. If valued at 7 percent (3 percent) net, the 
attendant opportunity cost for such an IMO would amount to $1.4 million 
($600,000) in the first year. The aggregate opportunity cost would be 
proportional to the total sales of all IMOs pursuing this course, 
assuming a uniform valuation rate.
    To the extent this condition is satisfied by insurance, the 
proposal states that the insurance must apply solely to actions brought 
by the Department of Labor, the Department of Treasury, the Pension 
Benefit Guaranty Corporation, Retirement Investors or plan fiduciaries 
(or their representatives) relating to Fixed Annuity Contract 
transactions, including but not limited to actions for failure to 
comply with the exemption or any contract entered into pursuant to the 
exemption, and it may not contain an exclusion for Fixed Annuity 
Contracts sold pursuant to the exemption. Any such insurance also may 
not have a deductible that exceeds 5% of the policy limits nor exclude 
coverage based on a self-insured retention or otherwise specify an 
amount that the Financial Institution must pay before a claim is 
covered by the fiduciary liability policy. To the extent this condition 
is satisfied by retaining assets, the assets must be unencumbered and 
not subject to security interests or other creditors.
    This condition provides IMOs with the flexibility to either obtain 
fiduciary liability insurance or set aside sufficient assets to satisfy 
potential liabilities. The Department expects that IMOs will choose the 
option that makes the best sense for them economically. If insurance 
markets are efficient and loss ratios are not very high, it is likely 
that insurance will be more attractive, unless an IMO faces 
particularly high fiduciary risks. In addition, an IMO with a more 
profitable best use for cash is more likely to find insurance more 
attractive than a cash set-aside. A number of the applicants 
specifically suggested that they would obtain insurance to cover

[[Page 7359]]

potential liability under the exemption, although the approaches and 
suggested amounts varied. However, some applicants indicated 
uncertainty as to the current availability of insurance for liability 
under the exemption.
    An upper bound on the costs of this provision an estimate is 
obtained by looking at the costs of using the set-aside reserve option. 
As discussed above, in 2015, approximately $34.1 billion in total sales 
FIAs were sold through the independent agent distribution channel. If 
all sales in the independent agent distribution channel were through an 
IMO utilizing the exemption then one percent, or $341 million, would 
have to be set aside as a reserve. The opportunity costs of this 
reserve using a return of 7 percent (3 percent) would be $23.9 million 
($10.2 million) for one year. There are at least three reasons why this 
estimate is too high: not all sales through the independent agent 
channel would be made using this exemption, the estimate of the total 
sales includes not just FIAs sold to IRAs, but all FIA sales, and to 
the extent the insurance option is cheaper IMOs will use that less 
expensive option and costs will be lower. \80\ The Department invites 
comments on these cost estimates.
---------------------------------------------------------------------------

    \80\ The Department notes that these insurance costs discussed 
here are not a cost of this proposal but part of the baseline 
reflected in the Departments Regulatory Impact Analysis of the final 
rule.
---------------------------------------------------------------------------

    This condition requiring IMOs to set aside cash or maintain 
insurance is likely to yield benefits for consumers. Set asides or 
insurance premiums that are paid out to compensate consumers for losses 
arising from fiduciary breaches will represent one, direct such 
benefit. In addition, the condition may deter fiduciary breaches. Some 
applicants indicated that they may pass on expenses attributable to 
this condition to advisers, particularly to advisers whose records or 
observed conduct indicate high fiduciary risk, or may step up efforts 
to screen advisers and end relationships with those deemed most risky. 
These steps by IMOs in turn could reinforce advisers' motivation to 
maintain high fiduciary standards.
    The Department considered an alternative of requiring a fixed 
minimum amount of fiduciary liability insurance to be purchased and 
requiring individual Advisers to carry the insurance themselves. The 
Department, however, chose the alternative of basing the insurance 
coverage or reserve requirement on premiums, because it views this 
method as the most efficient way to ensure that Financial Institutions 
have sufficient financial resources to satisfy any potential 
liabilities. The Department solicited comments on this approach and 
potential alternatives to the Department's chosen alternative earlier 
in this preamble.
    Audited Financial Statements: In order to confirm that the IMO has 
sound business practices, the Department chose the alternative of 
requiring IMOs to have financial statements that are audited annually 
by an independent certified public accountant. In addition, the audited 
financial statements must be available on the IMO's Web site. The cost 
of such audits will depend on the degree to which IMOs currently 
maintain detailed, audit-ready records, and the extent and complexity 
of IMOs operations and records. The Department invites comments on 
these costs.
    The Department understands that insurance companies submit their 
financial statements on a quarterly basis to the NAIC, which collects 
these data on behalf of state insurance commissioners.\81\ Unlike 
insurance companies; however, IMOs are generally not required to submit 
their financial statements to any regulatory authority. The Department 
does not believe IMOs will incur prohibitive costs to comply with the 
provision, because the condition was suggested by several applicants 
seeking individual exemptions. Some applicants indicated that periodic 
financial audits would provide reasonable assurance of the entity's 
financial health. The Department expects that requiring IMOs to conduct 
an annual audit of their financial statements, coupled with its 
disclosure on the Web site, will provide an opportunity for the 
Department and other interested persons to be alerted to any financial 
weaknesses or other items of concern with respect to the stability or 
solvency of the Financial Institution, or its ability to stand behind 
its commitments to Retirement Investors.
---------------------------------------------------------------------------

    \81\ NAIC Financial Statement Filing and Step through Guidance, 
Available at http://www.naic.org/industry_financial_filing.htm.
---------------------------------------------------------------------------

    As an alternative to an audit of financial statements, one 
applicant suggested that the audit should relate to the intermediary's 
internal controls and procedures. The applicant noted that banks and 
trust companies are currently required to obtain these reports under 
SSAE 16 (formerly SAS 70), and that the applicant could work with its 
auditors to prepare a similar report, but suggested that such an 
approach would require additional transition relief as the accounting 
industry would have to agree on the appropriate data points for an 
internal controls audit for an insurance intermediary and the resulting 
topics of the SSAE 16-like report. The Department did not propose this 
alternative, because there are no clear standards for such a 
compliance-based audit, and the Department believes it is most critical 
for financial statements to be audited to ensure that the financial 
viability of the IMO and its ability to meet its commitment to 
Retirement Investors can be determined and assessed.
    Mitigate Adverse Incentives: Proposed Section II(d)(3) specifically 
addresses incentives to Advisers, and provides that the Financial 
Institution's policies and procedures would be required to prohibit the 
use of quotas, appraisals, or performance or personnel actions, 
bonuses, contests, special awards, differential compensation, or other 
actions or incentives if they are intended or would reasonably be 
expected to cause Advisers to make recommendations that are not in the 
best interest of the Retirement Investor. The condition applies 
regardless of the source of the incentive. Moreover, the Department 
understands that some independent agents work with more than one 
intermediary. As noted above, the IMO applicants indicated that they 
have the capability to mitigate the incentives with respect to multiple 
insurance companies. The Department views this as a critical safeguard 
of this proposed exemption. The proposed condition is intended to 
ensure that an Adviser's relationship with multiple insurance companies 
(or multiple insurance intermediaries) does not generate compensation 
or incentive structures that undermine the Adviser's provision of 
advice that is in Retirement Investors' best interest.
    Proposed Section II(d)(3) does not specify the precise manner by 
which a Financial Institution must comply with the condition. The 
Department considered the alternative of requiring Financial 
Institutions to make their relationships with their Advisers exclusive 
with respect to the sale of Fixed Annuity Contracts to Retirement 
Investors. However, in order to provide maximum flexibility the 
Department chose not to require exclusivity in the proposal. 
Accordingly, a Financial Institution may take the alternative approach 
of contractually requiring an Adviser to provide information to the 
Financial Institution regarding all of the compensation and incentives 
provided by all of the other insurance companies and intermediaries 
through which the Adviser sells Fixed Annuity Contracts in which case 
the Financial Institution ultimately would be responsible for 
implementing the policies and

[[Page 7360]]

procedures to mitigate adverse incentives across all of the Advisers' 
incentive arrangements.
    Annuity Specific Disclosure: Section III(a) of the proposed class 
exemption requires an annuity-specific disclosure in connection with 
recommendations of all Fixed Annuity Contracts. As stated, the 
disclosure applies to all Fixed Annuity Contracts; however, the 
elements of the disclosure are required to be made only to the extent 
applicable.
    The objective of this disclosure is to ensure that Retirement 
Investors are informed of the risks and features of annuity products 
prior to entering into the annuity contract. While the information 
required to be disclosed could be available in the annuity contract or 
other document, the Department chose this alternative because it 
believes that the consumer will be better able to make an informed 
choice regarding whether to invest in the product if the features of 
the annuity contract are specifically highlighted in advance of the 
purchase in a separate, stand-alone written document. This disclosure 
would be required prior to the transmittal of the annuity application 
to the insurance company and would have to be made in connection with 
any recommendations to make additional deposits into the contract. The 
Department understands that in some cases, insurance companies 
currently provide an advance disclosure document, often referred to as 
a ``statement of understanding.'' This condition of the exemption would 
be satisfied if the required information is provided in a statement of 
understanding or similar document in accordance with the applicable 
time frames specified in the condition. The Department provides an 
estimate regarding the costs associated with the annuity-specific 
disclosure in the ``Paperwork Reduction Act'' section below.
    Premium Threshold: Finally, the proposed exemption would require 
IMOs to have transacted annual fixed annuity sales averaging at least 
$1.5 billion in premiums over each of the three prior fiscal years. As 
discussed above, this threshold equates approximately to the sales of 
the top 20 insurance companies. Relative to the top insurers, in 2014, 
an IMO with $1.5 billion sales in fixed annuities would have been 18th 
in sales, whereas in 2015, it would have been slightly below the top 20 
in fixed annuity sales.
    The Department chose the alternative of imposing this condition, to 
ensure that IMOs using the exemption are well-established entities 
possessing the financial stability and operational capacity to 
implement the anti-conflict policies and procedures required by the 
exemption. This proposed condition aims to ensure that the IMO is in 
the position to mitigate compensation incentives across products, which 
is a critical safeguard of the proposed exemption.
    The proposed $1.5 billion threshold was based on the 
representations in the applications. Not all applicants provided this 
information, but the applicants that did generally indicated sales of 
this amount or more. In addition, almost all IMOs that applied for 
individual exemptions are identified in media reports as large IMOs or 
super-IMOs. Some IMO applicants reported $4 billion to $5 billion in 
FIA sales alone in 2015.\82\ Putting this into context, these sales are 
higher than FIA sales of all but 2 insurance companies.\83\ In 2015, 
the insurance company that ranked 2nd in FIA sales reported $6.8 
billion, while the insurance company ranked 3rd reported $3.7 billion 
in FIA sales.\84\ Other IMO applicants reported more than $2 billion in 
FIA sales in 2015.\85\ This suggests that four IMOs seeking exemptions 
generated approximately 42% of FIA sales through the independent agent 
channel in 2015.\86\
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    \82\ In the application for the individual exemption, Advisors 
Excel disclosed its sales in FIA as $5 billion in 2015. Annexus 
reported $4 billion sales in FIA in 2015 according to Investment 
News article by Greg Iacurici on Jun 23, 2016.
    \83\ LIMRA Individual Annuity Report 2015.
    \84\ LIMRA ``Individual Annuity Sales--Fixed Annuity Break-Out: 
2015 Year-End Results'' Available at http://www.limra.com/uploadedFiles/limra.com/LIMRA_Root/Posts/PR/_Media/PDFs/2015-Top-20-Fixed-Breakout.pdf
    \85\ In the application for exemption, InForce Solutions states 
its annual sales in FIAs exceed $2.8 billion; Futurity First 
Financial reported $2.5 billion sales in FIA in 2015 according to an 
article ``IMOs Dance with DOL on Fiduciary Deadline'' by John Hilton 
on October 19, 2016. Available at http://insurancenewsnet.com/innarticle/1050689.
    \86\ Total combined sales from these four IMOs are $14.3 
billion. FIA sales by independent agents are approximately $34.1 
billion in 2015. Thus $14.3 billion FIA sales generated by these 
four IMOs are about 42% of $34.1 billion FIA sales by independent 
agents.
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    The Department believes that this dollar threshold covers IMOs most 
likely to make beneficial use of the exemption, because economies of 
scale are likely to yield advantages in efficiently carrying out 
compliance responsibilities. The largest share of compliance costs 
often is up-front fixed costs incurred to construct a compliance 
infrastructure. As the IMO gets larger, the burden of fixed costs can 
be spread out more widely.
    Because the sales threshold is based on a three-year average, some 
year-to-year volatility in sales would not cause IMOs to lose their 
eligibility for the exemption. Smoothing sales over three years 
provides IMOs with the degree of certainty and continuity that are 
necessary for IMOs to justify up-front expenditures to update 
compliance systems. However, if an exempted IMO falls slightly below 
this threshold, it may look for a way to boost sales volume, such as by 
acquiring another IMO or recruiting highly productive independent 
agents. Thus, in certain situations, this condition may accelerate 
mergers and acquisitions among IMOs. One applicant has reported that it 
already acquired three IMOs.\87\ All of these additional conditions are 
designed to protect the interest of consumers who purchase annuity 
products through the IMO distribution channel.
---------------------------------------------------------------------------

    \87\ Kristen Beckman, July 29, 2016, LifeHealthPro, ``Futurity 
First Financial Acquired Nationwide Annuity IMO'' available at 
http://www.lifehealthpro.com/2016/07/29/futurity-first-financial-acquires-nationwide-annui.
---------------------------------------------------------------------------

    These additional conditions could impose additional burdens on IMOs 
seeking exemptive relief that are not incurred by Financial 
Institutions seeking relief under the Best Interest Contract Exemption. 
However, with the exception of the annuity-specific disclosure, the 
Department does not have sufficient data to quantify the incremental 
costs associated with these conditions. Instead, the Department 
solicits public comments regarding costs related to the additional 
conditions set forth in the proposed class exemption.

Uncertainty

    While the Department received 22 individual exemption applications 
from IMOs, it is uncertain regarding how many applicants and/or other 
IMOs would use the proposed class exemption, if it is granted. The 
Department also is uncertain about the extent to which covered IMOs' 
compliance burdens, including burdens attributable to the additional 
conditions not required of Financial Institutions under the Best 
Interest Contract Exemption, would be less than the reduction in burden 
that otherwise would be shouldered by insurers acting as Financial 
Institutions. The Department invites comments regarding the 
uncertainties discussed above.

Paperwork Reduction Act

    As part of its continuing effort to reduce paperwork and respondent 
burden, the Department conducts a preclearance consultation program to 
provide the general public and Federal agencies with an opportunity to 
comment on proposed and continuing collections of information in 
accordance

[[Page 7361]]

with the Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 
3506(c)(2)(A)). This helps to ensure that the public understands the 
Department's collection instructions, respondents can provide the 
requested data in the desired format, reporting burden (time and 
financial resources) is minimized, collection instruments are clearly 
understood, and the Department can properly assess the impact of 
collection requirements on respondents.
    Currently, the Department is soliciting comments concerning the 
proposed information collection request (ICR) included in the Proposed 
Best Interest Contract Exemption for Insurance Intermediaries (PTE). A 
copy of the ICR may be obtained by contacting the PRA addressee shown 
below or at http://www.RegInfo.gov.
    The Department has submitted a copy of the proposed PTE to the 
Office of Management and Budget (OMB) in accordance with 44 U.S.C. 
3507(d) for review of its information collections. The Department and 
OMB are particularly interested in comments that:
     Evaluate whether the collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
     Evaluate the accuracy of the agency's estimate of the 
burden of the collection of information, including the validity of the 
methodology and assumptions used;
     Enhance the quality, utility, and clarity of the 
information to be collected; and
     Minimize the burden of the collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology, e.g., permitting 
electronic submission of responses.
    Comments should be sent to the Office of Information and Regulatory 
Affairs, Office of Management and Budget, Room 10235, New Executive 
Office Building, Washington, DC 20503; Attention: Desk Officer for the 
Employee Benefits Security Administration. OMB requests that comments 
be received within 30 days of publication of the proposed PTE to ensure 
their consideration.
    PRA Addressee: Address requests for copies of the ICR to 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) 219-5333. These are not toll-free numbers. ICRs 
submitted to OMB also are available at http://www.RegInfo.gov.
    As discussed in detail below, the proposed class exemption will 
require Financial Institutions to enter into a contractual arrangement 
with Retirement Investors regarding investments in IRAs and plans not 
subject to Title I of ERISA (non-ERISA plans), adopt written policies 
and procedures and make disclosures to Retirement Investors (including 
with respect to ERISA plans), the Department, and on a publicly 
accessible Web site, in order to receive relief from ERISA's and the 
Code's prohibited transaction rules for the receipt of compensation as 
a result of a Financial Institution's and its Adviser's advice (i.e., 
prohibited compensation). Financial Institutions will have to prepare a 
written documentation regarding the limitations that they place on 
recommendations. Financial Institutions will be required to have all 
transactions reviewed internally by a senior compliance official and 
maintain records necessary to prove that the conditions of the 
exemption have been met. In addition, the exemption provides a 
transition period from the Applicability Date to August 15, 2018. As a 
condition of relief during the transition period, Financial 
Institutions must make a disclosure (transition disclosure) to all 
Retirement Investors (in ERISA plans, IRAs, and non-ERISA plans) prior 
to or at the same time as the execution of recommended transactions. 
These requirements are ICRs subject to the Paperwork Reduction Act.
    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 ERISA plans and plan 
participants \88\ and 44.1 percent of contracts with and disclosures to 
IRAs and non-ERISA plans \89\ 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 contracts and disclosures will be distributed on 
paper and mailed at a cost of $0.05 per page for materials and $0.47 
for first class postage;
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    \88\ According to data from the National Telecommunications and 
Information Agency (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.
    \89\ 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.
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     Financial Institutions will use existing in-house 
resources to distribute required disclosures.
     Tasks associated with the ICRs performed by in-house 
personnel will be performed by clerical personnel at an hourly wage 
rate of $54.74 and financial managers at an hourly wage rate of 
$167.39.\90\
---------------------------------------------------------------------------

    \90\ 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-august-2016.pdf.
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     Financial Institutions will hire outside service providers 
to assist with nearly all other compliance costs;
     Outsourced legal assistance will be billed at an hourly 
rate of $335.00.\91\
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    \91\ This rate is the average of the hourly rate of an attorney 
with 4-7 years of experience and an attorney with 8-10 years of 
experience, taken from the Laffey Matrix. See http://www.justice.gov/sites/default/files/usao-dc/legacy/2014/07/14/Laffey%20Matrix_2014-2015.pdf.
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     Approximately 19 large insurance intermediary Financial 
Institutions will use this exemption.\92\ These Financial

[[Page 7362]]

Institutions will use this exemption in conjunction with any 
transactions involving recommendations regarding the purchase or sale 
of fixed annuity contracts in the retirement market.
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    \92\ The Department obtained the sales information about seven 
IMOs from their exemption applications and media reports. All these 
seven IMOs met $1.5 billion premium threshold and altogether 
reported approximately total $20.45 billion sales in 2015. Some IMOs 
reported sales from only FIAs, while other IMOs reported sales from 
FIAs and fixed-rate annuities. According to the LIMRA U.S. 
Individual Annuity Year book 2015, $38.4 billion total premiums--
$34.1 billion in FIAs and $4.3 billion in fixed-rate annuities--were 
sold through the independent agent distribution channel in 2015. 
This implies that approximately $17.95 billion FIA and fixed-rate 
annuity sales ($38.40-$20.45) were generated by other entities/
agents, Assuming that $17.95 billion sales were generated by IMOs, 
not by agents without any IMO affiliation and assuming that each IMO 
equally generated $1.5 billion sales, the Department estimates that 
twelve ($17.95 billlion/$1.5 billion) IMOs potentially would be 
eligible to use the exemption. Thus, in total, 19 (12+7) IMOs would 
potentially use the exemption. Although the Department recognizes 
that exemption-eligible IMOs would have all different sales records, 
in order to estimate the upper-bound number of potentially eligible 
IMOs, the Department assumed that IMOs equally generate $1.5 billion 
sales, the minimum premium sales threshold, for $17.95 billion 
sales. This approach reflects the Department's conservative approach 
to estimating the compliance costs associated with the proposed 
class exemption. The Department welcomes any comments and 
information about the number of IMOs meeting the minimum sales 
threshold condition set forth in the exemption.
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Compliance Costs Substantially Similar to Those in PTE 2016-01

    The Department believes that nearly all Financial Institutions will 
contract with outside service providers to implement the various 
compliance requirements of this exemption. As discussed previously, the 
conditions in this proposed PTE are similar to the conditions in the 
Department's Best Interest Contract Exemption (PTE 2016-01) but with 
some additional requirements. The Department believes it accurately 
estimated the aggregate burden imposed on the insurance industry in the 
Best Interest Contract Exemption, and it acknowledges that most of the 
entity-level burden attributed to insurance companies in the Best 
Interest Contract Exemption will instead be incurred by IMOs covered by 
this proposed PTE. For the conditions that are substantially similar 
between this PTE and PTE 2016-01, the Department estimates that IMOs 
will incur compliance costs identical to similarly sized insurance 
companies. Accordingly, for the conditions in this PTE that are 
substantially similar to those in PTE 2016-01, the per-firm costs are 
as follows:

 Start-Up Costs for Large Insurance Intermediaries: $6.6 
million
 Ongoing Costs for Large Insurance Intermediaries: $1.7 million

In order to receive compensation covered under this exemption, Section 
II requires Financial Institutions to acknowledge, in writing, their 
fiduciary status and adopt written policies and procedures designed to 
ensure compliance with the Impartial Conduct Standards. Financial 
Institutions and Advisers must make certain disclosures to Retirement 
Investors. Financial Institutions must generally enter into a written 
contract with Retirement Investors with respect to investments in IRAs 
and non-ERISA plans with certain required provisions, including 
affirmative agreement to adhere to the Impartial Conduct Standards.
    Sections III and V require Financial Institutions and Advisers to 
make certain disclosures. These disclosures include: (1) A pre-
transaction disclosure, stating the best interest standard of care, 
describing any Material Conflicts of Interest with respect to the 
transaction, disclosing the recommendation of proprietary products and 
products that generate third party payments (where applicable), and 
informing the Retirement Investor of disclosures available on the 
Financial Institution's Web site and informing the Retirement Investor 
that the investor may receive specific disclosure of the costs, fees, 
and other compensation associated with the transaction; (2) a 
disclosure, on request, describing in detail the costs, fees, and other 
compensation associated with the transaction; (3) a web-based 
disclosure; and (4) a one-time disclosure to the Department.
    Under Section IV, Financial Institutions will have to prepare a 
written documentation regarding the limitations they place on 
recommendations.
    Section IX requires Financial Institutions to make a transition 
disclosure, acknowledging their fiduciary status and that of their 
Advisers with respect to the advice, stating the Best Interest standard 
of care, and describing the Financial Institution's Material Conflicts 
of Interest and any limitations on product offerings, prior to or at 
the same time as the execution of any transactions during the 
transition period from the Applicability Date to August 15, 2018. The 
transition disclosure can cover multiple transactions, or all 
transactions occurring in the transition period.
    Financial Institutions will also be required to maintain records 
necessary to prove that the conditions of the exemption have been met.
    The Department is able to disaggregate an estimate of many of the 
legal costs from the costs above; however, it is unable to disaggregate 
any of the other costs.
    In response to a recommendation made during the Department's August 
2015 public hearing on the proposed Regulation, and in an attempt to 
create estimates with a clearer empirical evidentiary basis, the 
Department itself drafted examples of certain portions of the required 
disclosures, including a sample contract, the one-time disclosure to 
the Department, and the transition disclosure. The Department believes 
that the time spent updating existing contracts and disclosures in 
future years would be no longer than the time necessary to create the 
original disclosure. The Department did not attempt to draft the 
complete set of required disclosures because it expects that the amount 
of time necessary to draft such disclosures will vary greatly among 
firms. For example the Department did not attempt to draft sample 
policies and procedures, disclosures describing in detail the costs, 
fees, and other compensation associated with the transaction, 
documentation of the limitations regarding proprietary products or 
investments that generate third party payments, or a sample web 
disclosure. The Department expects the amount of time necessary to 
complete these disclosures will vary significantly based on a variety 
of factors including the nature of a firm's compensation structure, and 
the extent to which a firm's policies and procedures require review and 
signatures by different individuals.
    Considered in conjunction with the estimates provided in the 
proposal for PTE 2016-01, the Department estimates that outsourced 
legal assistance to draft standard contracts, contract disclosures, 
pre-transaction disclosures, the one-time disclosure to the Department, 
and the transition disclosures will cost an average of $3,857 per firm 
for a total of $73,000 during the first year. In subsequent years, it 
will cost an average of $3,076 per firm for a total of $58,000 annually 
to update the contracts, contract disclosures, and pre-transaction 
disclosures.
    The legal costs of these disclosures were disaggregated from the 
total compliance costs because these disclosures are expected to be 
relatively uniform. Although the tested disclosures generally took less 
time than many of the commenters on the proposal for PTE 2016-01 said 
they would, the Department acknowledges that the disclosures that were 
not tested are those that are expected to be the most time consuming. 
Importantly, as explained in greater detail in section 5.3 of the 
regulatory impact analysis for the Regulation, the Department is 
primarily relying on cost data provided by the Securities Industry and 
Financial Markets Association (SIFMA) and the Financial Services 
Institute (FSI) to calculate the total cost of the legal disclosures, 
rather than its own internal drafting of disclosures. Accordingly, in 
the event that any of the Department's estimates understate the time 
necessary to create and update the disclosures, it does not impact the 
total burden estimates. The total burden estimates were derived from 
SIFMA and FSI's all-inclusive costs. Therefore, in the event that legal 
costs are understated, other

[[Page 7363]]

cost estimates in this analysis would be overstated in an equal manner.
    In addition to legal costs for creating the contracts and 
disclosures, the start-up cost estimates include the costs of 
implementing and updating the IT infrastructure, creating the Web 
disclosures, gathering and maintaining the records necessary to produce 
the various disclosures and to prove that the conditions of the 
exemption have been met, developing policies and procedures, 
documenting limitations regarding proprietary products or investments 
that generate third party payments, addressing material conflicts of 
interest, monitoring Advisers' adherence to the Impartial Conduct 
Standards, and any other steps necessary to ensure compliance with the 
conditions of the exemption not described elsewhere. In addition to 
legal costs for updating the contracts and disclosures, the ongoing 
cost estimates include the costs of updating the IT infrastructure, 
updating the Web disclosures, reviewing processes for gathering and 
maintaining the records necessary to produce the various disclosures 
and to prove that the conditions of the exemption have been met, 
reviewing the policies and procedures, producing the detailed 
transaction disclosures on request, documenting limitations regarding 
proprietary products or investments that generate third party payments, 
monitoring investments as agreed upon with the Retirement Investor, 
addressing material conflicts of interest, monitoring Advisers' 
adherence to the Impartial Conduct Standards, and any other steps 
necessary to ensure compliance with the conditions of the exemption not 
described elsewhere. These costs total $126.1 million during the first 
year and $31.4 million in subsequent years. These costs do not include 
the costs of distributing disclosures and contracts, nor do they 
include the costs of the additional requirements imposed on insurance 
intermediary Financial Institutions in this proposed PTE, all of which 
are discussed below.

Distribution of Disclosures and Contracts

    The Department estimates that 15,000 Retirement Investors through 
ERISA plans and 212,000 Retirement Investors through IRAs and non-ERISA 
plans will receive a three-page transition disclosure during the first 
year.\93\
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    \93\ These estimates are based on LIMRA data on the number of 
fixed indexed annuity policies sold in 2015 to ERISA covered plans 
and IRAs and the market share held by independent agents, who might 
seek exemptive relief.
---------------------------------------------------------------------------

    Additionally, 15,000 Retirement Investors with respect to ERISA 
plans will receive a fifteen-page contract disclosure, and 212,000 
Retirement Investors with respect to IRAs and non-ERISA plans will 
receive a fifteen-page contract during the first year. In subsequent 
years, 4,300 Retirement Investors with respect to ERISA plans \94\ will 
receive a fifteen-page contract disclosure and 42,000 Retirement 
Investors with respect to IRAs and non-ERISA plans \95\ will receive a 
fifteen-page contract.
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    \94\ The Department estimates that approximately 28.7 percent of 
advisory relationships are new each year. (According to an analysis 
of Form 5500 Schedule C data conducted by Brightscope, Inc. and 
provided to the Department, 66,962 plans reported advisers in 2012, 
22,302 plans changed advisers from 2012 to 2013, and 16,196 plans 
changed advisers from 2013 to 2014. [(22,302 + 16,196)/2]/66,962 = 
28.7 percent.)
    \95\ The Department estimates that approximately 20 percent of 
advisory relationships are new each year. (2012 Cerulli data show 
that 20 percent of households opened a new account as a result of a 
new contact.)
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    The transition disclosure will be distributed electronically to 
51.8 percent of ERISA plan investors and 44.1 percent of IRAs and non-
ERISA plan investors during the first year. Paper disclosures will be 
mailed to the remaining 48.2 percent of ERISA plan investors and 55.9 
percent of IRAs and non-ERISA plan investors. The contract disclosure 
will be distributed electronically to 51.8 percent of ERISA plan 
investors during the first year or during any subsequent year in which 
the plan begins a new advisory relationship. Paper contract disclosures 
will be mailed to the remaining 48.2 percent of ERISA plan investors. 
The contract will be distributed electronically to 44.1 percent of IRAs 
and non-ERISA plan investors during the first year or during any 
subsequent year in which the investor enters into a new advisory 
relationship. Paper contracts will be mailed to the remaining 55.9 
percent of IRAs and non-ERISA plan investors. The Department estimates 
that electronic distribution will result in de minimis cost, while 
paper distribution will cost approximately $232,000 during the first 
year and $31,000 during subsequent years. Paper distribution will also 
require two minutes of clerical time to print and mail the disclosure 
or contract, resulting in 8,400 hours at an equivalent cost of $459,000 
during the first year and 900 hours at an equivalent cost of $47,000 
during subsequent years.
    The Department assumes that Retirement Investors interested in 
engaging in the purchase or sale of fixed indexed annuities will engage 
in one transaction per year that requires a pre-transaction disclosure. 
Therefore, the Department estimates that plans and IRAs will receive 
227,000 three-page pre-transaction disclosures during the second year 
and all subsequent years. The pre-transaction disclosures will be 
distributed electronically for 51.8 percent of the ERISA plan investors 
and 44.1 percent of the IRA holders and non-ERISA plan participants. 
The remaining 126,000 disclosures will be mailed. The Department 
estimates that electronic distribution will result in de minimis cost, 
while paper distribution will cost approximately $78,000. Paper 
distribution will also require two minutes of clerical time to print 
and mail the statement, resulting in 4,200 hours at an equivalent cost 
of $230,000 annually.
    The Department estimates that Financial Institutions will receive 
ten requests per year for more detailed information on the fees, costs, 
and compensation associated with the transaction during the second year 
and all subsequent years. The Department solicits comments on the 
number of requests for more detailed information that Financial 
Institutions can expect to receive. The detailed disclosures will be 
distributed electronically for 51.8 percent of the ERISA plan investors 
and 44.1 percent of the IRA holders and non-ERISA plan participants. 
The Department believes that requests for additional information will 
be proportionally likely with each Retirement Investor type. Therefore, 
approximately 105 detailed disclosures will be distributed on paper. 
The Department estimates that electronic distribution will result in de 
minimis cost, while paper distribution will cost approximately $76. 
Paper distribution will also require two minutes of clerical time to 
print and mail the statement, resulting in 4 hours at an equivalent 
cost of $192 annually.
    Finally, the Department estimates that all 19 Financial 
Institutions will submit the required one-page disclosure to the 
Department electronically at de minimis cost during the first year.

Costs for Provisions Not Included in PTE 2016-01

    In order to receive compensation covered under this proposed 
exemption, Section II(d)(5) requires a person designated pursuant to 
Section II(d)(2) as responsible for addressing Material Conflicts of 
Interest and monitoring Advisers' adherence to Impartial Conduct 
Standards to approve, in writing, recommended annuity applications 
involving Retirement Investors prior to transmitting the

[[Page 7364]]

applications to the insurance company. Section III(a) requires the 
Financial Institution to furnish the Retirement Investor with a pre-
transaction disclosure in accordance with the most recent Annuity 
Disclosure Model Regulation published by the NAIC or its successor. 
Section VIII(e)(2) requires a Financial Institution to have financial 
statements that are audited annually by an Independent certified public 
accountant.
    As discussed previously in this analysis, the Department estimates 
that Advisers working on behalf of Financial Institutions will make 
227,000 recommendations to Retirement Investors annually. The 
Department estimates that, on average, it will take a financial manager 
fifteen minutes to review and approve recommendations. This results in 
57,000 hours annually at an equivalent cost of $9.5 million.
    The Department assumes that each of the 19 Financial Institutions 
will hire outside service providers to create a template for the pre-
transaction annuity disclosure. The Department estimates that it will 
take legal service providers 1.5 hours to create the template during 
the first year and 1.5 hours to update the template during subsequent 
years. Once the template has been created, the disclosure itself will 
be populated by the IT systems (the costs of IT updates were discussed 
previously). The total cost burden for the outsourced legal assistance 
to create and update the template for the pre-transaction annuity 
disclosure is estimated to be $10,000 annually.
    The Department estimates that plans and IRAs will receive 227,000 
one page pre-transaction annuity disclosures annually. The pre-
transaction disclosures will be distributed electronically for 51.8 
percent of the ERISA plan investors and 44.1 percent of the IRA holders 
and non-ERISA plan participants. The remaining 126,000 disclosures will 
be mailed. The Department estimates that electronic distribution will 
result in de minimis cost, while paper distribution will cost 
approximately $65,000. Paper distribution will also require two minutes 
of clerical time to print and mail the statement, resulting in 4,200 
hours at an equivalent cost of $230,000 annually.
    The Department assumes that maintaining financial statements that 
are audited annually by an Independent certified public accountant is a 
best practice for businesses in this industry and that Financial 
Institutions generally engage in this practice. Therefore, no 
additional burden is assessed for this requirement. The Department 
solicits comment on how widespread the practice of obtaining annual 
audits is. In the event that it is not a usual and customary business 
practice, the Department solicits comments regarding the costs 
associated with this requirement.

Overall Summary

    Overall, the Department estimates that in order to meet the 
conditions of this class exemption, Financial Institutions and Advisers 
will distribute approximately 681,000 disclosures and contracts during 
the first year and 501,000 disclosures and contracts annually during 
subsequent years. Distributing these disclosures and contracts, 
reviewing recommendations, and maintaining records that the conditions 
of the exemption have been fulfilled will result in a total of 69,000 
hours of burden during the first year and 66,000 hours of burden 
annually during subsequent years. The equivalent cost of this burden is 
$10.2 million during the first year and $10.0 million annually in 
subsequent years. This exemption will result in an outsourced labor, 
materials, and postage cost burden of $126.4 million during the first 
year and $31.6 million annually during subsequent years.
    These paperwork burden estimates are summarized as follows:
    Type of Review: New collection.
    Agency: Employee Benefits Security Administration, Department of 
Labor.
    Title: Proposed Best Interest Contract Exemption for Insurance 
Intermediaries.
    OMB Control Number: 1210-NEW.
    Affected Public: Businesses or other for-profits; not for profit 
institutions.
    Estimated Number of Respondents: 19.
    Estimated Number of Annual Responses: 681,449 during the first year 
and 501,199 annually during subsequent years.
    Frequency of Response: When engaging in exempted transaction.
    Estimated Total Annual Burden Hours: 69,369 during the first year 
and 66,037 annually in subsequent years; includes 8,389 during the 
first year and 5,057 annually in subsequent years of duplicative burden 
that will be transferred over from OMB Control Number 1210-0156 upon 
approval of this information collection request.
    Estimated Total Annual Burden Cost: $126,369,454 during the first 
year and $31,617,550 annually during subsequent years; includes 
$126,294,476 during the first year and $31,542,571 annually in 
subsequent years of duplicative burden that will be transferred over 
from OMB Control Number 1210-0156 upon approval of this information 
collection request.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes 
certain requirements with respect to Federal rules that are subject to 
the notice and comment requirements of section 553(b) of the 
Administrative Procedure Act (5 U.S.C. 551 et seq.) and which are 
likely to have a significant economic impact on a substantial number of 
small entities. Unless an agency certifies that a rule will not have a 
significant economic impact on a substantial number of small entities, 
section 603 of the RFA requires the agency to present an initial 
regulatory flexibility analysis at the time of the publication of the 
notice of proposed rulemaking describing the impact of the rule on 
small entities. Small entities include small businesses, organizations 
and governmental jurisdictions.
    As discussed above, only IMOs that have transacted sales averaging 
at least $1.5 billion in premiums per fiscal year over it prior three 
fiscal years are eligible to use the proposed exemption. The Small 
Business Administration (SBA) defines a small business in the Financial 
Investments and Related Activities Sector as a business with up to 
$38.5 million in annual receipts. Although the Department believes that 
revenues of IMOs are closely related to sales volume, the Department is 
uncertain regarding the exact relationship between sales and revenue 
for these entities.
    Based on the limited information disclosed by the individual 
exemptions applicants, the Department believes that receipts of IMOs 
that are eligible to use proposed class exemption are likely to exceed 
the SBA revenue threshold and, therefore, such entities are unlikely to 
be considered small entities for purposes of the RFA.\96\ Small IMOs 
not

[[Page 7365]]

meeting the sales threshold would not incur any compliance costs, 
because they are not eligible to use the exemption. These IMOs could 
partner with larger IMOs using the proposed exemption insurers using 
the Best Interest Contract Exemption in order to conduct commission-
based sales.
---------------------------------------------------------------------------

    \96\ Only two applicant IMOs disclosed both sales and revenue 
information in their applications. One IMO reported that $37.7 
million in revenues were generated from $1.55 billion sales in fixed 
rate annuities and FIAs in 2015. Another IMO reported that revenues 
of $125 million were generated from $2.1+ billion sales in various 
insurance products in 2015. The IMO applicant with the largest 
reported revenue exceeds the SBA size threshold by three times. The 
Department notes that the even the IMO with the smaller revenue 
comes extremely close to meeting the SBA size threshold. 
Furthermore, it reports only the subset of its entire revenues--
revenues from fixed rate annuities and FIAs only. Most IMOs sell 
other types of insurance products such as life insurance. If it 
includes the revenues from other sources, the IMO with the smaller 
revenue is very likely to exceed the threshold set by the SBA. Thus, 
the Department believes that IMOs satisfying all conditions of this 
exemption are likely to have revenue that meets or exceeds the SBA 
size threshold. However, the Department is uncertain regarding why 
two IMOs with similar sales generate quite different levels of 
revenues and welcomes any comments regarding how IMOs generate 
revenue from sales of fixed annuity products.
---------------------------------------------------------------------------

    Accordingly, based on the foregoing, pursuant to section 605(b) of 
the RFA, the Assistant Secretary of the Employee Benefits Security 
Administration hereby proposes to certify that the proposed rule will 
not have a significant economic impact on a substantial number of small 
entities.

Congressional Review Act

    The proposed exemption is subject to the Congressional Review Act 
provisions of the Small Business Regulatory Enforcement Fairness Act of 
1996 (5 U.S.C. 801 et seq.) and, if finalized, will be transmitted to 
Congress and the Comptroller General for review. The proposed exemption 
is a ``major rule'' as that term is defined in 5 U.S.C. 804, because it 
is likely to result in (1) an annual effect on the economy of $100 
million or more; (2) a major increase in costs or prices for consumers, 
individual industries, or Federal, State, or local government agencies, 
or geographic regions; or (3) significant adverse effects on 
competition, employment, investment, productivity, innovation, or on 
the ability of United States-based enterprises to compete with foreign-
based enterprises in domestic and export markets.

Federalism Statement

    Executive Order 13132 outlines fundamental principles of 
federalism. It also requires adherence to specific criteria by federal 
agencies in formulating and implementing policies that have 
``substantial direct effects'' on the states, the relationship between 
the national government and states, or on the distribution of power and 
responsibilities among the various levels of government. Federal 
agencies promulgating regulations that have these federalism 
implications must consult with state and local officials, and describe 
the extent of their consultation and the nature of the concerns of 
state and local officials in the preamble to the final regulation. The 
Department does not believe this proposed class exemption has 
federalism implications because it has no substantial direct effect on 
the States, on the relationship between the national government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government.

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 
act prudently and discharge his or her duties respecting the plan 
solely in the interests of the participants and beneficiaries of the 
plan. Additionally, the fact that a transaction is the subject of an 
exemption does not affect the requirement of Code section 401(a) that 
the plan must operate for the exclusive benefit of the employees of the 
employer maintaining the plan and their beneficiaries;
    (2) Before the exemption may be granted under ERISA section 408(a) 
and Code section 4975(c)(2), the Department must find that the 
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 the plan and IRA 
owners;
    (3) If granted, the proposed exemption is applicable to a 
particular transaction only if the transaction satisfies the conditions 
specified in the exemption; and
    (4) The proposed exemption, if granted, 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.

Proposed Exemption

Section I--Best Interest Contract Exemption for Insurance 
Intermediaries

    (a) In general. ERISA and the Internal Revenue Code prohibit 
fiduciary advisers to employee benefit plans (Plans) and individual 
retirement accounts (IRAs) from receiving compensation that varies 
based on their investment advice. Similarly, fiduciary advisers are 
prohibited from receiving compensation from third parties in connection 
with their advice. This exemption permits certain persons who provide 
investment advice to Retirement Investors, and associated Financial 
Institutions, Affiliates and other Related Entities, to receive such 
otherwise prohibited compensation as described below.
    (b) Covered transactions. This exemption permits Advisers, 
Financial Institutions, and their Affiliates and Related Entities, to 
receive compensation as a result of their provision of investment 
advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 
4975(e)(3)(B) to a Retirement Investor regarding the purchase of a 
Fixed Annuity Contract, as defined in Section VIII(d).
    As defined in Section VIII(m) of the exemption, a Retirement 
Investor is: (1) A participant or beneficiary of a Plan with authority 
to direct the investment of assets in his or her Plan account or to 
take a distribution; (2) the beneficial owner of an IRA acting on 
behalf of the IRA; or (3) a Retail Fiduciary with respect to a Plan or 
IRA.
    As detailed below, Financial Institutions and Advisers seeking to 
rely on the exemption must adhere to Impartial Conduct Standards in 
rendering advice regarding Fixed Annuity Contracts. In addition, 
Financial Institutions must adopt policies and procedures designed to 
ensure that their individual Advisers adhere to the Impartial Conduct 
Standards; disclose important information relating to fees, 
compensation, and Material Conflicts of Interest; and retain records 
demonstrating compliance with the exemption. The exemption provides 
relief from the restrictions of ERISA section 406(a)(1)(D) and 406(b) 
and the sanctions imposed by Code section 4975(a) and (b), by reason of 
Code section 4975(c)(1)(D), (E) and (F). The Adviser and Financial 
Institution must comply with the applicable conditions of Sections II-V 
to rely on this exemption. This document also contains separate 
exemptions in Section VI (Exemption for Purchases of Fixed Annuity 
Contracts) and Section VII (Exemption for Pre-Existing Transactions).
    (c) Exclusions. This exemption does not apply if:
    (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, 
Financial Institution or any Affiliate is the

[[Page 7366]]

employer of employees covered by the Plan, or (ii) the Adviser or 
Financial Institution is a named fiduciary or plan administrator (as 
defined in ERISA section 3(16)(A)) with respect to the Plan, or an 
affiliate thereof, that was selected to provide advice to the Plan by a 
fiduciary who is not Independent;
    (2) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo-advice''); or
    (3) The Adviser has or exercises any discretionary authority or 
discretionary control with respect to the recommended transaction.

Section II--Contract, Impartial Conduct, and Other Requirements

    The conditions set forth in this section include certain Impartial 
Conduct Standards, such as a Best Interest Standard, that Advisers and 
Financial Institutions must satisfy to rely on the exemption. In 
addition, Section II(d) and (e) require Financial Institutions to adopt 
anti-conflict policies and procedures that are reasonably designed to 
ensure that Advisers adhere to the Impartial Conduct Standards, and 
requires disclosure of important information about the Financial 
Institutions' services, applicable fees and compensation. With respect 
to IRAs and Plans not covered by Title I of ERISA, the Financial 
Institutions must agree that they and their Advisers will adhere to the 
exemption's standards in a written contract that is enforceable by the 
Retirement Investors. To minimize compliance burdens, the exemption 
provides that the contract terms may be incorporated into annuity 
contracts or applications, and permits reliance on a negative consent 
process with respect to existing contract holders. Advisers and 
Financial Institutions need not execute the contract before they make a 
recommendation to the Retirement Investor. However, the contract must 
cover any advice given prior to the contract date in order for the 
exemption to apply to such advice. There is no contract requirement for 
recommendations to Retirement Investors about investments in Plans 
covered by Title I of ERISA, but the Impartial Conduct Standards and 
other requirements of Section II(b)-(e), including a written 
acknowledgment of fiduciary status, must be satisfied in order for 
relief to be available under the exemption, as set forth in Section 
II(g). Section II imposes the following conditions on Financial 
Institutions and Advisers:
    (a) Contracts with Respect to Investments in IRAs and Other Plans 
Not Covered by Title I of ERISA. If the investment advice concerns an 
IRA or a Plan that is not covered by Title I of ERISA, the advice is 
subject to an enforceable written contract on the part of the Financial 
Institution, which may be a master contract covering multiple 
recommendations, that is entered into in accordance with this Section 
II(a) and incorporates the terms set forth in Section II(b)-(d). The 
Financial Institution additionally must provide the disclosures 
required by Section II(e). The contract must cover advice rendered 
prior to the execution of the contract in order for the exemption to 
apply to such advice and related compensation.
    (1) Contract Execution and Assent.
    (i) New Contracts. Prior to or at the same time as the execution of 
the recommended transaction, the Financial Institution enters into a 
written contract with the Retirement Investor acting on behalf of the 
Plan, participant or beneficiary account, or IRA, incorporating the 
terms required by Section II(b)-(d). The terms of the contract may 
appear in a standalone document or they may be incorporated into an 
annuity contract or application, or similar document, or amendment 
thereto. The contract must be enforceable against the Financial 
Institution. The Retirement Investor's assent to the contract may be 
evidenced by handwritten or electronic signatures.
    (ii) Amendment of Existing Contracts by Negative Consent. As an 
alternative to executing a contract in the manner set forth in the 
preceding paragraph, the Financial Institution may amend Existing 
Contracts to include the terms required in Section II(b)-(d) by 
delivering the proposed amendment and the disclosure required by 
Section II(e) to the Retirement Investor prior to August 15, 2018, and 
considering the failure to terminate the amended contract within 30 
days as assent. If the Retirement Investor does terminate the contract 
within that 30-day period, this exemption will provide relief for 14 
days after the date on which the termination is received by the 
Financial Institution. An Existing Contract is an annuity contract that 
was executed before August 15, 2018, and remains in effect. If the 
Financial Institution elects to use the negative consent procedure, it 
may deliver the proposed amendment by mail or electronically, but it 
may not impose any new contractual obligations, restrictions, or 
liabilities on the Retirement Investor by negative consent.
    (2) Notice. The Financial Institution maintains an electronic copy 
of the Retirement Investor's contract on its Web site that is 
accessible by the Retirement Investor.
    (b) Fiduciary. The Financial Institution affirmatively states in 
writing that it and the Adviser(s) act as fiduciaries under ERISA or 
the Code, or both, with respect to any investment advice provided by 
the Financial Institution or the Adviser subject to the contract or, in 
the case of an ERISA plan, with respect to any investment 
recommendations regarding the Plan or participant or beneficiary 
account.
    (c) Impartial Conduct Standards. The Financial Institution 
affirmatively states that it and its Advisers will adhere to the 
following standards and, they in fact, comply with the standards:
    (1) When providing investment advice to the Retirement Investor, 
the Financial Institution and the Adviser(s) provide investment advice 
that is, at the time of the recommendation, in the Best Interest of the 
Retirement Investor. As further defined in Section VIII(c), such 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, without regard to the financial or 
other interests of the Adviser, Financial Institution or any Affiliate, 
Related Entity, or other party;
    (2) The recommended transaction will not cause the Financial 
Institution, Adviser or their Affiliates or Related Entities to 
receive, directly or indirectly, compensation for their services that 
is in excess of reasonable compensation within the meaning of ERISA 
section 408(b)(2) and Code section 4975(d)(2).
    (3) Statements by the Financial Institution and its Advisers to the 
Retirement Investor about the recommended transaction, fees and 
compensation, Material Conflicts of Interest, and any other matters 
relevant to a Retirement Investor's investment decisions, will not be 
materially misleading at the time they are made.
    (d) Warranties. The Financial Institution affirmatively warrants, 
and in fact complies with, the following:
    (1) The Financial Institution has adopted and will comply with 
written policies and procedures reasonably and prudently designed to 
ensure that its Advisers adhere to the Impartial

[[Page 7367]]

Conduct Standards set forth in Section II(c);
    (2) In formulating its policies and procedures, the Financial 
Institution has specifically identified and documented its Material 
Conflicts of Interest; adopted measures reasonably and prudently 
designed to prevent Material Conflicts of Interest from causing 
violations of the Impartial Conduct Standards set forth in Section 
II(c); and designated a person or persons, identified by name, title or 
function, responsible for addressing Material Conflicts of Interest and 
monitoring their Advisers' adherence to the Impartial Conduct 
Standards;
    (3) The Financial Institution's policies and procedures prohibit 
the use of quotas, appraisals, performance or personnel actions, 
bonuses, contests, special awards, differential compensation or other 
actions or incentives that are intended or would reasonably be expected 
to cause Advisers to make recommendations that are not in the Best 
Interest of the Retirement Investor. Notwithstanding the foregoing, 
this Section II(d)(3) does not prevent the provision of differential 
compensation (whether in type or amount, and including, but not limited 
to, commissions) based on investment decisions by Plans, participant or 
beneficiary accounts, or IRAs, to the extent that the Financial 
Institution's policies and procedures and incentive practices, when 
viewed as a whole, are reasonably and prudently designed to avoid a 
misalignment of the interests of Advisers with the interests of the 
Retirement Investors they serve as fiduciaries (such compensation 
practices can include differential compensation based on neutral 
factors tied to the differences in the services delivered to the 
Retirement Investor with respect to the different types of investments, 
as opposed to the differences in the amounts of Third Party Payments 
the Financial Institution receives in connection with particular 
investment recommendations);
    (4) The Financial Institution has approved in advance all written 
marketing materials used by Advisers after determining that such 
materials provide a balanced description of the risks and features of 
the Fixed Annuity Contracts to be recommended;
    (5) A person designated pursuant to Section II(d)(2) as responsible 
for addressing Material Conflicts of Interest and monitoring Advisers' 
adherence to the Impartial Conduct Standards approves, in writing, 
recommended annuity applications involving Retirement Investors prior 
to transmitting the applications to the insurance company;
    (6) The Financial Institution requires in its written contract with 
Advisers or sub-intermediaries that Advisers must (i) use written 
marketing materials only if they are approved in advance by the 
Financial Institution as described in Section II(d)(4), and (ii) 
provide the disclosure required by Section III(a) and orally review the 
information in Section III(a)(1) with the Retirement Investor;
    (7) The Financial Institution either: (i) Requires in its written 
contract with the insurance company and each Adviser or sub-
intermediary that all compensation to be paid to the Adviser or sub-
intermediary with respect to the purchase of a Fixed Annuity Contract 
by a Retirement Investor pursuant to this exemption must be paid to the 
Adviser or sub-intermediary exclusively by the Financial Institution; 
or (ii) requires in its written contract with the insurance company and 
each Adviser or sub-intermediary that with respect to the purchase of a 
Fixed Annuity Contract by a Retirement Investor pursuant to this 
exemption, (A) the Adviser or sub-intermediary may only sell annuities 
to Retirement Investors for which the commission structure has been 
approved in advance by the IMO and (B) all other forms of compensation, 
whether cash or non-monetary, must be paid to the Adviser or sub-
intermediary exclusively by the Financial Institution; and
    (8) The Financial Institution will provide, and require its 
Advisers to attend, annual training on compliance with the exemption 
that is conducted by a person who has appropriate technical training 
and proficiency with ERISA and the Code. The training must, at a 
minimum, cover the policies and procedures, the Impartial Conduct 
Standards, Material Conflicts of Interest, ERISA and Code compliance 
(including applicable fiduciary duties and the prohibited transaction 
provisions), ethical conduct, and the consequences of failure to comply 
with the conditions of this exemption (including any loss of exemptive 
relief provided herein).
    (e) Disclosures. In the Best Interest Contract or in a separate 
single written disclosure provided to the Retirement Investor with the 
contract, or, with respect to ERISA plans, in another single written 
disclosure provided to the Plan prior to or at the same time as the 
execution of the recommended transaction, the Financial Institution 
clearly and prominently:
    (1) States the Best Interest standard of care owed by the Adviser 
and Financial Institution to the Retirement Investor; informs the 
Retirement Investor of the services provided by the Financial 
Institution and the Adviser; and describes how the Retirement Investor 
will pay for services, directly or through Third Party Payments. If, 
for example, the Retirement Investor will pay through commissions or 
other forms of transaction-based payments, the contract or writing must 
clearly disclose that fact;
    (2) Describes Material Conflicts of Interest; discloses any fees or 
charges the Financial Institution, its Affiliates, or the Adviser 
imposes upon the Retirement Investor or the Retirement Investor's 
annuity; and states the types of compensation that the Financial 
Institution, its Affiliates, and the Adviser expect to receive from 
third parties in connection with Fixed Annuity Contracts recommended to 
Retirement Investors;
    (3) Informs the Retirement Investor that the Retirement Investor 
has the right to obtain copies of the Financial Institution's written 
description of its policies and procedures adopted in accordance with 
Section II(d), as well as the specific disclosure of costs, fees, and 
compensation, including Third Party Payments, regarding recommended 
transactions, as set forth in Section III(a), below, described in 
dollar amounts, percentages, formulas, or other means reasonably 
designed to present materially accurate disclosure of their scope, 
magnitude, and nature in sufficient detail to permit the Retirement 
Investor to make an informed judgment about the costs of the 
transaction and about the significance and severity of the Material 
Conflicts of Interest, and describes how the Retirement Investor can 
get the information, free of charge; provided that if the Retirement 
Investor's request is made prior to the transaction, the information 
must be provided prior to the transaction, and if the request is made 
after the transaction, the information must be provided within 30 
business days after the request;
    (4) Includes a link to the Financial Institution's Web site as 
required by Section III(b), and informs the Retirement Investor that: 
(i) Model contract disclosures updated as necessary on a quarterly 
basis are maintained on the Web site, and (ii) the Financial 
Institution's written description of its policies and procedures 
adopted in accordance with Section II(d) are available free of charge 
on the Web site;
    (5) Discloses to the Retirement Investor whether the Financial 
Institution offers Proprietary Products or receives Third Party 
Payments with respect to any recommended Fixed

[[Page 7368]]

Annuity Contracts; and to the extent the Financial Institution or 
Adviser limits investment recommendations, in whole or part, to 
Proprietary Products or annuities that generate Third Party Payments, 
notifies the Retirement Investor of the limitations placed on the 
universe of investments that the Adviser may offer for purchase, sale, 
exchange, or holding by the Retirement Investor. The notice is 
insufficient if it merely states that the Financial Institution or 
Adviser ``may'' limit investment recommendations based on whether the 
annuities are Proprietary Products or generate Third Party Payments, 
without specific disclosure of the extent to which recommendations are, 
in fact, limited on that basis;
    (6) Provides contact information (telephone and email) for a 
representative of the Financial Institution that the Retirement 
Investor can use to contact the Financial Institution with any concerns 
about the advice or service they have received; and
    (7) Describes whether or not the Adviser and Financial Institution 
will monitor the Retirement Investor's annuity contract and alert the 
Retirement Investor to any recommended change to the annuity contract, 
and, if so monitoring, the frequency with which the monitoring will 
occur and the reasons for which the Retirement Investor will be 
alerted.
    (8) The Financial Institution will not fail to satisfy this Section 
II(e), or violate a contractual provision based thereon, solely because 
it, acting in good faith and with reasonable diligence, makes an error 
or omission in disclosing the required information, provided the 
Financial Institution discloses the correct information as soon as 
practicable, but not later than 30 days after the date on which it 
discovers or reasonably should have discovered the error or omission. 
To the extent compliance with this Section II(e) requires Advisers and 
Financial Institutions to obtain information from entities that are not 
closely affiliated with them, they may rely in good faith on 
information and assurances from the other entities, as long as they do 
not know that the materials are incomplete or inaccurate. This good 
faith reliance applies unless the entity providing the information to 
the Adviser and Financial Institution is (1) a person directly or 
indirectly through one or more intermediaries, controlling, controlled 
by, or under common control with the Adviser or Financial Institution; 
or (2) any officer, director, employee, agent, registered 
representative, relative (as defined in ERISA section 3(15)), member of 
family (as defined in Code section 4975(e)(6)) of, or partner in, the 
Adviser or Financial Institution.
    (f) Ineligible Contractual Provisions. Relief is not available 
under the exemption if a Financial Institution's contract contains the 
following:
    (1) Exculpatory provisions disclaiming or otherwise limiting 
liability of the Adviser or Financial Institution for a violation of 
the contract's terms;
    (2) Except as provided in paragraph (f)(4) of this Section, a 
provision under which the Plan, IRA or Retirement Investor waives or 
qualifies its right to bring or participate in a class action or other 
representative action in court in a dispute with the Adviser or 
Financial Institution, or in an individual or class claim agrees to an 
amount representing liquidated damages for breach of the contract; 
provided that, the parties may knowingly agree to waive the Retirement 
Investor's right to obtain punitive damages or rescission of 
recommended transactions to the extent such a waiver is permissible 
under applicable state or federal law; or
    (3) Agreements to arbitrate or mediate individual claims in venues 
that are distant or that otherwise unreasonably limit the ability of 
the Retirement Investors to assert the claims safeguarded by this 
exemption.
    (4) In the event that the provision on pre-dispute arbitration 
agreements for class or representative claims in paragraph (f)(2) of 
this Section is ruled invalid by a court of competent jurisdiction, 
this provision shall not be a condition of this exemption with respect 
to contracts subject to the court's jurisdiction unless and until the 
court's decision is reversed, but all other terms of the exemption 
shall remain in effect.
    (g) ERISA plans. Section II(a) does not apply to recommendations to 
Retirement Investors regarding investments in Plans that are covered by 
Title I of ERISA. For such investment advice, relief under the 
exemption is conditioned upon the Adviser and Financial Institution 
complying with certain provisions of Section II, as follows:
    (1) Prior to or at the same time as the execution of the 
recommended transaction, the Financial Institution provides the 
Retirement Investor with a written statement of the Financial 
Institution's and its Advisers' fiduciary status, in accordance with 
Section II(b).
    (2) The Financial Institution and the Adviser comply with the 
Impartial Conduct Standards of Section II(c).
    (3) The Financial Institution adopts policies and procedures 
incorporating the requirements and prohibitions set forth in Section 
II(d), and the Financial Institution and Adviser comply with those 
requirements and prohibitions.
    (4) The Financial Institution provides the disclosures required by 
Section II(e).
    (5) The Financial Institution and Adviser do not in any contract, 
instrument, or communication: Purport to disclaim any responsibility or 
liability for any responsibility, obligation, or duty under Title I of 
ERISA to the extent the disclaimer would be prohibited by ERISA section 
410; purport to waive or qualify the right of the Retirement Investor 
to bring or participate in a class action or other representative 
action in court in a dispute with the Adviser or Financial Institution, 
or require arbitration or mediation of individual claims in locations 
that are distant or that otherwise unreasonably limit the ability of 
the Retirement Investors to assert the claims safeguarded by this 
exemption.

Section III--Web and Transaction-Based Disclosures

    The Financial Institution must satisfy the following conditions 
with respect to an investment recommendation, to be covered by this 
exemption:
    (a) Transaction Disclosure. The Financial Institution provides the 
Retirement Investor, prior to the transmittal of a recommended 
application for a Fixed Annuity Contract to the insurance company, the 
following disclosure, clearly and prominently, in a single written 
document, that:
    (1) Provides a disclosure regarding the Fixed Annuity Contract that 
is in accordance with the most recent Annuity Disclosure Model 
Regulation published by the National Association of Insurance 
Commissioners, or its successor, as of the time of the transaction;
    (2) States the Best Interest standard of care owed by the Adviser 
and Financial Institution to the Retirement Investor; and describes any 
Material Conflicts of Interest;
    (3) Informs the Retirement Investor that the Retirement Investor 
has the right to obtain copies of the Financial Institution's written 
description of its policies and procedures adopted in accordance with 
Section II(d), as well as specific disclosure of costs, fees and other 
compensation including Third Party Payments regarding recommended 
transactions. The costs, fees, and other compensation may be described 
in dollar amounts, percentages, formulas, or other means reasonably 
designed to present materially accurate disclosure of their scope, 
magnitude, and nature in

[[Page 7369]]

sufficient detail to permit the Retirement Investor to make an informed 
judgment about the costs of the transaction and about the significance 
and severity of the Material Conflicts of Interest. The information 
required under this Section must be provided to the Retirement Investor 
prior to the transaction, if requested prior to the transaction, and, 
if the request is made after the transaction, the information must be 
provided within 30 business days after the request; and
    (4) Includes a link to the Financial Institution's Web site as 
required by Section III(b) and informs the Retirement Investor that: 
(i) Model contract disclosures or other model notices, updated as 
necessary on a quarterly basis, are maintained on the Web site, and 
(ii) the Financial Institution's written description of its policies 
and procedures as required under Section III(b)(1)(iv) are available 
free of charge on the Web site.
    (5) Following disclosure of the information in Section III(a)(1), 
the Adviser must orally review the information with the Retirement 
Investor, and both the Adviser and Retirement Investor must sign the 
transaction disclosure and indicate that the oral review has occurred.
    (6) The disclosures in subsections (2)-(4) do not have to be 
repeated for subsequent recommendations by the Adviser and Financial 
Institution to invest in the same Fixed Annuity Contract within one 
year of the provision of the contract disclosure in Section II(e) or a 
previous disclosure pursuant to this Section III(a), unless there are 
material changes in the subject of the disclosure.
    (b) Web Disclosure. For relief to be available under the exemption 
for any investment recommendation, the conditions of Section III(b) 
must be satisfied.
    (1) The Financial Institution maintains a Web site, freely 
accessible to the public and updated no less than quarterly, which 
contains:
    (i) A discussion of the Financial Institution's business model and 
the Material Conflicts of Interest associated with that business model;
    (ii) A schedule of typical contract fees and service charges, if 
applicable;
    (iii) A model contract or other model notice of the contractual 
terms (if applicable) and required disclosures described in Section 
II(b)-(e), which are reviewed for accuracy no less frequently than 
quarterly and updated within 30 days if necessary;
    (iv) A written description of the Financial Institution's policies 
and procedures that accurately describes or summarizes key components 
of the policies and procedures relating to conflict-mitigation and 
incentive practices in a manner that permits Retirement Investors to 
make an informed judgment about the stringency of the Financial 
Institution's protections against conflicts of interest;
    (v) To the extent applicable, a list of all product manufacturers 
and other parties with whom the Financial Institution maintains 
arrangements that provide Third Party Payments to either the Adviser or 
the Financial Institution with respect to Fixed Annuity Contracts 
recommended to Retirement Investors; a description of the arrangements, 
including a statement on whether and how these arrangements impact 
Adviser compensation, and a statement on any benefits the Financial 
Institution provides to the product manufacturers or other parties in 
exchange for the Third Party Payments;
    (vi) Disclosure of the Financial Institution's compensation and 
incentive arrangements with Advisers including, if applicable, any 
incentives (including both cash and non-monetary compensation or 
awards) to Advisers for recommending particular product manufacturers 
or Fixed Annuity Contracts to Retirement Investors, or for Advisers to 
move to the Financial Institution from another firm or to stay at the 
Financial Institution, and a full and fair description of any payout or 
compensation grids, but not including information that is specific to 
any individual Adviser's compensation or compensation arrangement; and
    (vii) A copy of the Financial Institution's most recent audited 
financial statements required in accordance with Section VIII(e)(2).
    (viii) The Web site may describe the above arrangements with 
product manufacturers, Advisers, and others by reference to dollar 
amounts, percentages, formulas, or other means reasonably calculated to 
present a materially accurate description of the arrangements. 
Similarly, the Web site may group disclosures based on reasonably-
defined categories of Fixed Annuity Contracts, product manufacturers, 
Advisers, and arrangements, and it may disclose reasonable ranges of 
values, rather than specific values, as appropriate. But, however 
constructed, the Web site must fairly disclose the scope, magnitude, 
and nature of the compensation arrangements and Material Conflicts of 
Interest in sufficient detail to permit visitors to the Web site to 
make an informed judgment about the significance of the compensation 
practices and Material Conflicts of Interest with respect to 
transactions recommended by the Financial Institution and its Advisers.
    (2) To the extent the information required by this Section is 
provided in other disclosures which are made public, the Financial 
Institution may satisfy this Section III(b) by posting such disclosures 
to its Web site with an explanation that the information can be found 
in the disclosures and a link to where it can be found.
    (3) The Financial Institution is not required to disclose 
information pursuant to this Section III(b) if such disclosure is 
otherwise prohibited by law.
    (4) In addition to providing the written description of the 
Financial Institution's policies and procedures on its Web site, as 
required under Section III(b)(1)(iv), Financial Institutions must 
provide their complete policies and procedures adopted pursuant to 
Section II(d) to the Department upon request.
    (5) In the event that a Financial Institution determines to group 
disclosures as described in subsection (1)(vii), it must retain the 
data and documentation supporting the group disclosure during the time 
that it is applicable to the disclosure on the Web site, and for six 
years after that, and make the data and documentation available to the 
Department within 90 days of the Department's request.
    (c)(1) The Financial Institution will not fail to satisfy the 
conditions in this Section III solely because it, acting in good faith 
and with reasonable diligence, makes an error or omission in disclosing 
the required information, or if the Web site is temporarily 
inaccessible, provided that, (i) in the case of an error or omission on 
the Web site, the Financial Institution discloses the correct 
information as soon as practicable, but not later than seven (7) days 
after the date on which it discovers or reasonably should have 
discovered the error or omission, and (ii) in the case of an error or 
omission with respect to the transaction disclosure, the Financial 
Institution discloses the correct information as soon as practicable, 
but not later than 30 days after the date on which it discovers or 
reasonably should have discovered the error or omission.
    (2) To the extent compliance with the Section III disclosures 
requires Advisers and Financial Institutions to obtain information from 
entities that are not closely affiliated with them, they may rely in 
good faith on information and assurances from the other entities, as 
long as they do not know that the materials are incomplete or 
inaccurate. This good faith reliance applies unless the entity 
providing the information to

[[Page 7370]]

the Adviser and Financial Institution is (i) a person directly or 
indirectly through one or more intermediaries, controlling, controlled 
by, or under common control with the Adviser or Financial Institution; 
or (ii) any officer, director, employee, agent, registered 
representative, relative (as defined in ERISA section 3(15)), member of 
family (as defined in Code section 4975(e)(6)) of, or partner in, the 
Adviser or Financial Institution.
    (3) The good faith provisions of this Section apply to the 
requirement that the Financial Institution retain the data and 
documentation supporting the group disclosure during the time that it 
is applicable to the disclosure on the Web site and provide it to the 
Department upon request, as set forth in subsection (b)(1)(vii) and 
(b)(5) above. In addition, if such records are lost or destroyed, due 
to circumstances beyond the control of the Financial Institution, then 
no prohibited transaction will be considered to have occurred solely on 
the basis of the unavailability of those records; and no party, other 
than the Financial Institution responsible for complying with 
subsection (b)(1)(vii) and (b)(5) will 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 applicable, if the records are not 
maintained or provided to the Department within the required 
timeframes.

Section IV--Proprietary Products and Third Party Payments

    (a) General. A Financial Institution that at the time of the 
transaction restricts Advisers' investment recommendations, in whole or 
part, to Proprietary Products or to Fixed Annuity Contracts that 
generate Third Party Payments, may rely on this exemption provided all 
the applicable conditions of the exemption are satisfied.
    (b) Satisfaction of the Best Interest standard. The Financial 
Institution satisfies the Best Interest standard of Section VIII(c) as 
follows:
    (1) Prior to or at the same time as the execution of the 
recommended transaction, the Retirement Investor is clearly and 
prominently informed in writing that the Financial Institution offers 
Proprietary Products or receives Third Party Payments with respect to 
the purchase, sale, exchange, or holding of Fixed Annuity Contracts; 
and the Retirement Investor is informed in writing of the limitations 
placed on the universe of Fixed Annuity Contracts that the Adviser may 
recommend to the Retirement Investor. The notice is insufficient if it 
merely states that the Financial Institution or Adviser ``may'' limit 
investment recommendations based on whether the annuities are 
Proprietary Products or generate Third Party Payments, without specific 
disclosure of the extent to which recommendations are, in fact, limited 
on that basis;
    (2) Prior to or at the same time as the execution of the 
recommended transaction, the Retirement Investor is fully and fairly 
informed in writing of any Material Conflicts of Interest that the 
Financial Institution or Adviser have with respect to the recommended 
transaction, and the Adviser and Financial Institution comply with the 
disclosure requirements set forth in Section III above (providing for 
web and transaction-based disclosure of costs, fees, compensation, and 
Material Conflicts of Interest);
    (3) The Financial Institution documents in writing its limitations 
on the universe of recommended Fixed Annuity Contracts; documents in 
writing the Material Conflicts of Interest associated with any 
contract, agreement, or arrangement providing for its receipt of Third 
Party Payments or associated with the sale or promotion of Proprietary 
Products; documents in writing any services it will provide to 
Retirement Investors in exchange for Third Party Payments, as well as 
any services or consideration it will furnish to any other party, 
including the payor, in exchange for the Third Party Payments; 
reasonably concludes that the limitations on the universe of 
recommended Fixed Annuity Contracts and Material Conflicts of Interest 
will not cause the Financial Institution or its Advisers to receive 
compensation in excess of reasonable compensation for Retirement 
Investors as set forth in Section II(c)(2); reasonably determines, 
after consideration of the policies and procedures established pursuant 
to Section II(d), that these limitations and Material Conflicts of 
Interest will not cause the Financial Institution or its Advisers to 
make imprudent investment recommendations; and documents in writing the 
bases for its conclusions;
    (4) The Financial Institution adopts, monitors, implements, and 
adheres to policies and procedures and incentive practices that meet 
the terms of Section II(d); and, in accordance with Section II(d)(3), 
neither the Financial Institution nor (to the best of its knowledge) 
any Affiliate or Related Entity uses or relies upon quotas, appraisals, 
performance or personnel actions, bonuses, contests, special awards, 
differential compensation or other actions or incentives that are 
intended or would reasonably be expected to cause the Adviser to make 
imprudent investment recommendations, to subordinate the interests of 
the Retirement Investor to the Adviser's own interests, or to make 
recommendations based on the Adviser's considerations of factors or 
interests other than the investment objectives, risk tolerance, 
financial circumstances, and needs of the Retirement Investor;
    (5) At the time of the recommendation, the amount of compensation 
and other consideration reasonably anticipated to be paid, directly or 
indirectly, to the Adviser, Financial Institution, or their Affiliates 
or Related Entities for their services in connection with the 
recommended transaction is not in excess of reasonable compensation 
within the meaning of ERISA section 408(b)(2) and Code section 
4975(d)(2); and
    (6) The Adviser's recommendation 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 
Adviser's recommendation is not based on the financial or other 
interests of the Adviser or on the Adviser's consideration of any 
factors or interests other than the investment objectives, risk 
tolerance, financial circumstances, and needs of the Retirement 
Investor.

Section V--Disclosure to the Department and Recordkeeping

    This Section establishes record retention and disclosure conditions 
that a Financial Institution must satisfy for the exemption to be 
available for compensation received in connection with recommended 
transactions.
    (a) EBSA Disclosure. Before receiving compensation in reliance on 
the exemption in Section I, the Financial Institution notifies the 
Department of its intention to rely on this exemption. The notice will 
remain in effect until revoked in writing by the Financial Institution. 
The notice need not identify any Plan or IRA. The notice must be 
provided by email to [email protected].
    (b) Recordkeeping. The Financial Institution maintains for a period 
of six (6) years, in a manner that is reasonably accessible for 
examination, the records necessary to enable the persons described in 
paragraph (c) of this Section to determine whether the conditions of 
this exemption have been

[[Page 7371]]

met with respect to a transaction, except that:
    (1) If such records are lost or destroyed, due to circumstances 
beyond the control of the Financial Institution, then no prohibited 
transaction will be considered to have occurred solely on the basis of 
the unavailability of those records; and
    (2) No party, other than the Financial Institution responsible for 
complying with this paragraph (c), will 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 applicable, if the records are not 
maintained or are not available for examination as required by 
paragraph (c), below.
    (c)(1) Except as provided in paragraph (c)(2) of this Section or 
precluded by 12 U.S.C. 484, and notwithstanding any provisions of ERISA 
section 504(a)(2) and (b), the records referred to in paragraph (b) of 
this Section are reasonably available at their customary location for 
examination during normal business hours by:
    (i) Any authorized employee or representative of the Department or 
the Internal Revenue Service;
    (ii) Any fiduciary of a Plan that engaged in an investment 
transaction pursuant to this exemption, or any authorized employee or 
representative of such fiduciary;
    (iii) Any contributing employer and any employee organization whose 
members are covered by a Plan described in paragraph (c)(1)(ii), or any 
authorized employee or representative of these entities; or
    (iv) Any participant or beneficiary of a Plan described in 
paragraph (c)(1)(ii), IRA owner, or the authorized representative of 
such participant, beneficiary or owner; and
    (2) None of the persons described in paragraph (c)(1)(ii)-(iv) of 
this Section are authorized to examine records regarding a recommended 
transaction involving another Retirement Investor, privileged trade 
secrets or privileged commercial or financial information of the 
Financial Institution, or information identifying other individuals.
    (3) Should the Financial Institution refuse to disclose information 
on the basis that the information is exempt from disclosure, the 
Financial Institution must, by the close of the thirtieth (30th) day 
following the request, provide a written notice advising the requestor 
of the reasons for the refusal and that the Department may request such 
information.
    (4) 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--Exemption for Purchases of Fixed Annuity Contracts

    (a) In general. In addition to prohibiting fiduciaries from 
receiving compensation from third parties and compensation that varies 
based on their investment advice, ERISA and the Internal Revenue Code 
prohibit the purchase by a Plan, participant or beneficiary account, or 
IRA of a Fixed Annuity Contract from an insurance company that is a 
service provider to the Plan or IRA. This exemption permits a Plan, 
participant or beneficiary account, or IRA to engage in a purchase with 
a Financial Institution that is a service provider or other party in 
interest or disqualified person to the Plan or IRA. This exemption is 
provided because Fixed Annuity Contract transactions often involve 
prohibited purchases involving entities that have a pre-existing party 
in interest relationship to the Plan or IRA.
    (b) Covered transactions. The restrictions of ERISA section 
406(a)(1)(A) and (D), and the sanctions imposed by Code section 4975(a) 
and (b), by reason of Code section 4975(c)(1)(A) and (D), shall not 
apply to the purchase of a Fixed Annuity Contract by a Plan, 
participant or beneficiary account, or IRA, from a Financial 
Institution that is a party in interest or disqualified person.
    (c) The following conditions are applicable to this exemption:
    (1) The transaction is effected by the Financial Institution in the 
ordinary course of its business;
    (2) The compensation, direct or indirect, for any services rendered 
by the Financial Institution and its Affiliates and Related Entities is 
not in excess of reasonable compensation within the meaning of ERISA 
section 408(b)(2) and Code section 4975(d)(2); and
    (3) The terms of the transaction are at least as favorable to the 
Plan, participant or beneficiary account, or IRA as the terms generally 
available in an arm's length transaction with an unrelated party.
    (d) Exclusions: The exemption in this Section VI does not apply if:
    (1) The Plan is covered by Title I of ERISA and (i) the Adviser, 
Financial Institution or any Affiliate is the employer of employees 
covered by the Plan, or (ii) the Adviser and Financial Institution is a 
named fiduciary or plan administrator (as defined in ERISA section 
3(16)(A)) with respect to the Plan, or an affiliate thereof, that was 
selected to provide advice to the plan by a fiduciary who is not 
Independent.
    (2) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo-advice''); or
    (3) The Adviser has or exercises any discretionary authority or 
discretionary control with respect to the recommended transaction.

Section VII--Exemption for Pre-Existing Transactions

    (a) In general. ERISA and the Internal Revenue Code prohibit 
Advisers, Financial Institutions and their Affiliates and Related 
Entities from receiving compensation that varies based on their 
investment advice. Similarly, fiduciary advisers are prohibited from 
receiving compensation from third parties in connection with their 
advice. Some Advisers and Financial Institutions did not consider 
themselves fiduciaries within the meaning of 29 CFR 2510-3.21 before 
the applicability date of the amendment to 29 CFR 2510-3.21 (the 
Applicability Date). Other Advisers and Financial Institutions entered 
into transactions involving Plans, participant or beneficiary accounts, 
or IRAs before the Applicability Date, in accordance with the terms of 
a prohibited transaction exemption that has since been amended. This 
exemption permits Advisers, Financial Institutions, and their 
Affiliates and Related Entities, to receive compensation in connection 
with a Plan's, participant or beneficiary account's or IRA's purchase, 
exchange, or holding of a Fixed Annuity Contract that was acquired 
prior to the Applicability Date, as described and limited below.
    (b) Covered transaction. Subject to the applicable conditions 
described below, the restrictions of ERISA section 406(a)(1)(A), 
406(a)(1)(D) and 406(b) and the sanctions imposed by Code section 
4975(a) and (b), by reason of Code section 4975(c)(1)(A), (D), (E) and 
(F), shall not apply to the receipt of compensation by an Adviser, 
Financial Institution, and any Affiliate and Related Entity, as a 
result of investment advice (including advice to hold) provided to a 
Plan, participant or beneficiary or IRA owner in connection

[[Page 7372]]

with the purchase, or holding of a fixed annuity (i) that was acquired 
before the Applicability Date, or (ii) that was acquired pursuant to a 
recommendation to continue to adhere to a systematic purchase program 
established before the Applicability Date. This Exemption for Pre-
Existing Transactions is conditioned on the following:
    (1) The compensation is received pursuant to an agreement, 
arrangement or understanding that was entered into prior to the 
Applicability Date and that has not expired or come up for renewal 
post-Applicability Date;
    (2) The purchase, exchange, holding or sale of the investment 
property was not otherwise a non-exempt prohibited transaction pursuant 
to ERISA section 406 and Code section 4975 on the date it occurred;
    (3) The compensation is not received in connection with the Plan's, 
participant or beneficiary account's or IRA's investment of additional 
amounts in the previously acquired investment vehicle;
    (4) The amount of the compensation paid, directly or indirectly, to 
the Adviser, Financial Institution, or their Affiliates or Related 
Entities in connection with the transaction is not in excess of 
reasonable compensation within the meaning of ERISA section 408(b)(2) 
and Code section 4975(d)(2); and
    (5) Any investment recommendations made after the Applicability 
Date by the Financial Institution or Adviser with respect to the 
investment property reflect 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 are made without regard to the 
financial or other interests of the Adviser, Financial Institution or 
any Affiliate, Related Entity, or other party.

Section VIII--Definitions

    For purposes of this exemption:
    (a) ``Adviser'' means an individual who:
    (1) Is a fiduciary of the Plan or IRA by reason of the provision of 
investment advice described in ERISA section 3(21)(A)(ii) or Code 
section 4975(e)(3)(B), or both, and the applicable regulations, with 
respect to the assets of the Plan or IRA involved in the recommended 
transaction;
    (2) Is an employee, independent contractor, or agent of a Financial 
Institution; and
    (3) Satisfies the federal and state regulatory and licensing 
requirements of insurance laws with respect to the covered transaction, 
as applicable
    (b) ``Affiliate'' of an Adviser or Financial Institution means--
    (1) Any person directly or indirectly through one or more 
intermediaries, controlling, controlled by, or under common control 
with the Adviser or Financial Institution. For this purpose, 
``control'' means the power to exercise a controlling influence over 
the management or policies of a person other than an individual;
    (2) Any officer, director, partner, employee, or relative (as 
defined in ERISA section 3(15)), of the Adviser or Financial 
Institution; and
    (3) Any corporation or partnership of which the Adviser or 
Financial Institution is an officer, director, or partner.
    (c) Investment advice is in the ``Best Interest'' of the Retirement 
Investor when the Adviser and Financial Institution providing the 
advice 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 Retirement Investor, without regard to the financial or 
other interests of the Adviser, Financial Institution or any Affiliate, 
Related Entity, or other party.
    (d) ``Fixed Annuity Contract'' means an annuity contract that 
satisfies applicable state standard nonforfeiture laws at the time of 
issue and the benefits of which do not vary, in whole or in part, on 
the basis of the investment experience of a separate account or 
accounts maintained by the insurer. Fixed Annuity Contracts includes 
fixed rate annuity contracts and fixed indexed annuity contracts.
    (e) ``Financial Institution'' means an insurance intermediary that 
has a direct written contract regarding the distribution of Fixed 
Annuity Contracts with both (i) the insurance company issuing the Fixed 
Annuity Contract and (ii) the Adviser or another intermediary (sub-
intermediary) that has a direct written contract with the Adviser, and 
that also:
    (1) Satisfies the applicable licensing requirements of the 
insurance laws of each state in which it conducts business;
    (2) Has financial statements that are audited annually by an 
Independent certified public accountant;
    (3) Maintains, to satisfy potential liability under ERISA or the 
Code as a result of this exemption, or any contract entered into 
pursuant to Section II(a), in an aggregate amount which must be at 
least 1% of the average annual amount of premium sales of Fixed Annuity 
Contracts sold by the Financial Institution to Retirement Investors 
pursuant to this exemption over its prior three fiscal years:
    (A) Fiduciary liability insurance that:
    (i) Applies solely to actions brought by the Department of Labor, 
the Department of Treasury, the Pension Benefit Guaranty Corporation, 
Retirement Investors or plan fiduciaries (or their representatives) 
relating to Fixed Annuity Contract transactions, including but not 
limited to actions for failure to comply with the exemption or any 
contract entered into pursuant to Section II(a);
    (ii) does not contain an exclusion of Fixed Annuity Contracts;
    (iii) has a deductible that does not exceed 5% of the policy 
limits; and
    (iv) does not exclude claims coverage based on a self-insured 
retention or otherwise specify an amount that the Financial Institution 
must pay before a claim is covered by the fiduciary liability policy;
    (B) cash, bonds, bank certificates of deposit, U.S. Treasury 
Obligations that are unencumbered and not subject to security interests 
or other creditors, or
    (C) a combination of (A) and (B); and
    (4) Has transacted sales of Fixed Annuity Contracts averaging at 
least $1.5 billion in premiums per fiscal year over its prior three 
fiscal years;
    (f) ``Independent'' means a person that:
    (1) Is not the Adviser, the Financial Institution or any Affiliate 
relying on the exemption;
    (2) Does not have a relationship to or an interest in the Adviser, 
the Financial Institution or Affiliate that might affect the exercise 
of the person's best judgment in connection with transactions described 
in this exemption; and
    (3) Does not receive or is not projected to receive within the 
current federal income tax year, compensation or other consideration 
for his or her own account from the Adviser, Financial Institution or 
Affiliate in excess of 2% of the person's annual revenues based upon 
its prior income tax year.
    (g) ``Individual Retirement Account'' or ``IRA'' means any account 
or annuity described in Code section 4975(e)(1)(B) through (F), 
including, for example, an

[[Page 7373]]

individual retirement account described in section 408(a) of the Code 
and a health savings account described in Code section 223(d).
    (h) A ``Material Conflict of Interest'' exists when an Adviser or 
Financial Institution 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 Retirement Investor.
    (i) ``Plan'' means any employee benefit plan described in section 
3(3) of ERISA and any plan described in section 4975(e)(1)(A) of the 
Code.
    (j) ``Proprietary Product'' means a product that is managed, issued 
or sponsored by the Financial Institution or any of its Affiliates.
    (k) ``Related Entity'' means any entity other than an Affiliate in 
which the Adviser or Financial Institution has an interest which may 
affect the exercise of its best judgment as a fiduciary.
    (l) A ``Retail Fiduciary'' means a fiduciary of a Plan or IRA that 
is not described in section (c)(1)(i) of the Regulation (29 CFR 2510.3-
21(c)(1)(i)).
    (m) ``Retirement Investor'' means--
    (1) A participant or beneficiary of a Plan subject to Title I of 
ERISA or described in section 4975(e)(1)(A) of the Code, with authority 
to direct the investment of assets in his or her Plan account or to 
take a distribution,
    (2) The beneficial owner of an IRA acting on behalf of the IRA, or
    (3) A Retail Fiduciary with respect to a Plan subject to Title I of 
ERISA or described in section 4975(e)(1)(A) of the Code or IRA.
    (n) ``Third-Party Payments'' include sales charges and insurance 
commissions when not paid directly by the Plan, participant or 
beneficiary account, or IRA; gross dealer concessions; revenue sharing 
payments; distribution, solicitation or referral fees; volume-based 
fees; fees for seminars and educational programs; and any other 
compensation, consideration or financial benefit provided to the 
Financial Institution or an Affiliate or Related Entity by a third 
party as a result of a transaction involving a Plan, participant or 
beneficiary account, or IRA.

Section IX--Transition Period for Exemption

    (a) In general. ERISA and the Internal Revenue Code prohibit 
fiduciary advisers to Plans and IRAs from receiving compensation that 
varies based on their investment advice. Similarly, fiduciary advisers 
are prohibited from receiving compensation from third parties in 
connection with their advice. This transition period provides relief 
from the restrictions of ERISA section 406(a)(1)(D), and 406(b) and the 
sanctions imposed by Code section 4975(a) and (b) by reason of Code 
section 4975(c)(1) (D), (E), and (F) for the period from April 10, 
2017, to August 15, 2018 (the Transition Period) for Advisers, 
Financial Institutions, and their Affiliates and Related Entities, to 
receive such otherwise prohibited compensation subject to the 
conditions described in Section IX(d).
    (b) Covered transactions. This provision permits Advisers, 
Financial Institutions, and their Affiliates and Related Entities to 
receive compensation as a result of their provision of investment 
advice within the meaning of ERISA section 3(21)(A)(ii) or Code section 
4975(e)(3)(B) to a Retirement Investor regarding Fixed Annuity 
Contracts during the Transition Period.
    (c) Exclusions. This provision does not apply if:
    (1) The Plan is covered by Title I of ERISA, and (i) the Adviser, 
Financial Institution or any Affiliate is the employer of employees 
covered by the Plan, or (ii) the Adviser or Financial Institution is a 
named fiduciary or plan administrator (as defined in ERISA section 
3(16)(A)) with respect to the Plan, or an Affiliate thereof, that was 
selected to provide advice to the Plan by a fiduciary who is not 
Independent;
    (2) The compensation is received as a result of investment advice 
to a Retirement Investor generated solely by an interactive Web site in 
which computer software-based models or applications provide investment 
advice based on personal information each investor supplies through the 
Web site without any personal interaction or advice from an individual 
Adviser (i.e., ``robo-advice''); or
    (3) The Adviser has or exercises any discretionary authority or 
discretionary control with respect to the recommended transaction.
    (d) Conditions. The provision is subject to the following 
conditions:
    (1) Before receiving compensation in reliance on the exemption in 
this Section IX, the Financial Institution notifies the Department of 
its intention to rely on this exemption and makes the following 
representation to the Department: ``[Name of Financial Institution] is 
presently taking steps to put in place the systems necessary to comply 
with Section I of the Best Interest Contract Exemption for Insurance 
Intermediaries, and fully intends to comply with all applicable 
conditions for such relief after the expiration of the transition 
period.'' The notice will remain in effect until revoked in writing by 
the Financial Institution. The notice need not identify any Plan or 
IRA. The notice must be provided by email to [email protected].
    (2) The Financial Institution and Adviser adhere to the following 
standards:
    (i) When providing investment advice to the Retirement Investor, 
the Financial Institution and the Adviser(s) provide investment advice 
that is, at the time of the recommendation, in the Best Interest of the 
Retirement Investor. As further defined in Section VIII(c), such 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, without regard to the financial or 
other interests of the Adviser, Financial Institution or any Affiliate, 
Related Entity, or other party;
    (ii) The recommended transaction does not cause the Financial 
Institution, Adviser or their Affiliates or Related Entities to 
receive, directly or indirectly, compensation for their services that 
is in excess of reasonable compensation within the meaning of ERISA 
section 408(b)(2) and Code section 4975(d)(2).
    (iii) Statements by the Financial Institution and its Advisers to 
the Retirement Investor about the recommended transaction, fees and 
compensation, Material Conflicts of Interest, and any other matters 
relevant to a Retirement Investor's investment decisions, are not 
materially misleading at the time they are made.
    (3) Disclosures. The Financial Institution complies with applicable 
disclosure obligations under state insurance law with respect to the 
sale of the Fixed Annuity Contract, and provides to the Retirement 
Investor, prior to the transmittal of the annuity application to the 
insurance company, a single written disclosure that clearly and 
prominently:
    (i) Affirmatively states that the Financial Institution and the 
Adviser(s) act as fiduciaries under ERISA or the Code, or both, with 
respect to the recommendation;
    (ii) Sets forth the standards in paragraph (d)(1) of this Section 
and affirmatively states that it and the Adviser(s) adhered to such 
standards in recommending the transaction;
    (iii) Describes the Financial Institution's Material Conflicts of 
Interest; and
    (iv) Discloses to the Retirement Investor whether the Financial 
Institution offers Proprietary Products or

[[Page 7374]]

receives Third Party Payments with respect to any Fixed Annuity 
Contract recommendations; and to the extent the Financial Institution 
or Adviser limits Fixed Annuity Contract recommendations, in whole or 
part, to Proprietary Products or investments that generate Third Party 
Payments, notifies the Retirement Investor of the limitations placed on 
the universe of investment recommendations. The notice is insufficient 
if it merely states that the Financial Institution or Adviser ``may'' 
limit investment recommendations based on whether the investments are 
Proprietary Products or generate Third Party Payments, without specific 
disclosure of the extent to which recommendations are, in fact, limited 
on that basis.
    (v) The disclosure may be provided in person, electronically or by 
mail. It does not have to be repeated for any subsequent 
recommendations during the Transition Period.
    (vi) The Financial Institution will not fail to satisfy this 
Section IX(d)(3) solely because it, acting in good faith and with 
reasonable diligence, makes an error or omission in disclosing the 
required information, provided the Financial Institution discloses the 
correct information as soon as practicable, but not later than 30 days 
after the date on which it discovers or reasonably should have 
discovered the error or omission. To the extent compliance with this 
Section IX(d)(3) requires Financial Institutions to obtain information 
from entities that are not closely affiliated with them, they may rely 
in good faith on information and assurances from the other entities, as 
long as they do not know, or unless they should have known, that the 
materials are incomplete or inaccurate. This good faith reliance 
applies unless the entity providing the information to the Adviser and 
Financial Institution is (1) a person directly or indirectly through 
one or more intermediaries, controlling, controlled by, or under common 
control with the Adviser or Financial Institution; or (2) any officer, 
director, employee, agent, registered representative, relative (as 
defined in ERISA section 3(15)), member of family (as defined in Code 
section 4975(e)(6)) of, or partner in, the Adviser or Financial 
Institution.
    (4) The Financial Institution approves in advance all written 
marketing materials used by Advisers after determining that such 
materials provide a balanced description of the risks and features of 
the annuity contracts to be recommended;
    (5) The Financial Institution designates a person or persons, 
identified by name and title or function, responsible for addressing 
Material Conflicts of Interest and monitoring Advisers' adherence to 
the Impartial Conduct Standards and the person approves, in writing, 
recommended applications for Fixed Annuity Contracts involving 
Retirement Investors prior to transmitting them to the insurance 
company; and
    (6) The Financial Institution complies with the recordkeeping 
requirements of Section V(b) and (c).

    Signed at Washington, DC, this 12th day of January, 2017.
Lyssa Hall,
Director of Exemption Determinations, Employee Benefits Security 
Administration, U.S. Department of Labor.
[FR Doc. 2017-01316 Filed 1-18-17; 8:45 am]
 BILLING CODE 4510-29-P