When assessing the reasonableness of a charge, one generally needs to consider the value of all the services and benefits provided for the charge, not just some. If parties need additional guidance in this respect, they should refer to the Department’s interpretations under ERISA section 408(b)(2) and Code section 4975(d)(2) and the Department will provide additional guidance if necessary.
As in other cases, the DOL was aware of complaints that the reasonable compensation standard was too vague. However, it rejected this complaint noting that the concept of reasonable compensation has a long history.
In response to comments on this requirement, the Department has retained the reasonable compensation standard as a condition of the exemption, and requires financial institutions to include the standard in their contracts with IRA and non-ERISA plan retirement investors. As noted above, the “reasonable compensation” obligation is a feature of ERISA and the Code.
The DOL was well aware of the concerns of some in the insurance industry; however, it concluded that the interests of the investor is paramount.
An Insurance Example
In this regard, many commenters expressed concern that the disclosure requirements proposed in this exemption were inapplicable to insurance products and that they would not be able to satisfy the best interest and other Impartial Conduct Standards, or provide a sufficiently broad range of assets to satisfy the conditions of Section IV of this exemption, as proposed. Several raised questions about how the proposed definition of “financial institution” would apply to insurance companies. According to these commenters, the conditions proposed for this exemption would be so difficult and costly that broker-dealers would stop selling variable annuities to certain IRA customers and retirement plans rather than comply.
Both the Securities and Exchange Commission (SEC) staff and Finra have issued guidance on indexed annuities
Given the risks and complexities of these investments, the Department has determined that indexed annuities are appropriately subject to the same protective conditions of the Best Interest Contract Exemption that apply to variable annuities. As a result, retirement investors are acutely dependent on sound advice that is untainted by the conflicts of interest posed by advisors’ incentives to secure the annuity purchase, which can be quite substantial. Both categories of annuities, variable and indexed annuities, are susceptible to abuse, andrRetirement investors would equally benefit in both cases from the protections of this exemption, including the conditions that clearly establish the enforceable standards of fiduciary conduct and fair dealing as applicable to advisors and financial institutions.
The Impartial Conduct Standards represent fundamental obligations of fair dealing and fiduciary conduct. The concepts of prudence, undivided loyalty and reasonable compensation are all deeply rooted in ERISA and the common law of agency and trusts. These longstanding concepts of law and equity were developed in significant part to deal with the issues that arise when agents and persons in a position of trust have conflicting loyalties, and accordingly, are well-suited to the problems posed by conflicted investment advice.