Appendix B

Related Entity, for services provided in connection with the purchase, |

| holding or sale of any securities or other property-Asse#, as a result of |
the Adviser's and Financial Institution's advice, that was purchased, |

|

|

|

sold, or held by a Plan, participant or beneficiary account, or an IRA
before the Applicability Date if:

(1) The compensation is not excluded pursuant to Section I(c) of the Best |
Interest Contract Exemption;

(2) The compensation is received pursuant to an agreement, arrangement or f
understanding that was entered into prior to the Applicability Date, |
and that has not expired or come up for renewal after the

Applicability Date;_and |

13) Phe -advis ad Financial Institut 4 . ide—addit
ade the Blan reg che_-purehase;—sel polding £h
II
after t} licab Dat
PP ;
(4) The transaction pure! 4 £ etwas not a non-exempt

prohibited transaction pursuant to ERISA section 406 and Code section
4975 on the date it occurred.

| Section VII£--Definitions
For purposes of these exemptions:
(a) **Adviser'' means an individual who:

(1) Is a fiduciary of a Plan or IRA solely by reason of the provision of
investment advice described in ERISA section 3(21) (A) (ii) or Code
section 4975(e) (3) (B), ox both, and the applicable regulations, with
respect to the Assets involved in the transaction;

(2) Is an employee, independent contractor, agent, or registered
representative of a Financial Institution; and

(3) Satisfies the applicable federal and state regulatory and licensing
requirements of insurance, panking, and securities laws with respect
to the covered transaction.

(b) *°A£filiate'' 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, 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; and

(3) Any corporation or partnership of which the Adviser or Financial
Institution is an officer, director or employee or in which the
Adviser or Financial Institution is a partner.


Appendix B

1-4

~ zr £ + + x
prions
A 4 Th DE yt faces ££. £. = - aot
: : x £ = a $7
ey ne Dae Liable tothe pi es ponees
rk = i ~
a rad _£. fh 1 hold é . *
7 Ter = eid
6 a as th asi + 4 4 ith
get : est
tool of £8 1 ably . the_Best
ee peeie Tavector ip ightof i+ tment
Ft 7 “ = ~ .
a a kien ewithetand
~~: 4 : * .
Fi tal trast + tet fe 4
n F purchaser
exhoid — shoth +h +5—a 2: as
+ 3
Phivd Party BP, r +h T 4 th
. nided_thatr
iad TP “
cy ne wt . 7” A teen finding that eh
ma a the 2 + 2 jlabile—+ H
= © . Tding_byPl Laipant and benefi
> g + ia
oes = a + +3 +—t+ = id :
7 2 . $



Appendix B

oh at & by the P & ant
2 ggeeg 3 re >y lens Pp fied
account; ERA, ings quarte ed th the holdingsy
oh oe -eeceived byt cut onda: ee .
_ * th the heldt x such _quaete
i . a ted 5:
e sags
44-2 ey-of nore rutual i, 1 fund
ad ath £h as
: = s—pak
day _Retusns Ab the Retirement investor level:
4) the identity of she Adviser;
\ phe begin --quarter val € the Ret fas kexts Pextfel
) eg of-quartes ch es ePo= -
- dof etexval eh eis £ Tnyestorls pextfolie+ and
Ly Bach—ext Le Slows £ the Ret tayastorts Boxtfelic
Sng_eh tox and the dat hich it 4
$ gee t eeurs
efoliet! the Ret &
Dilan-aceount TRH
: abliel 4
pul e
fan a
—_ paragraph
bed ot th
¢ she
dividual

Endnote Comments Regarding Edits

We ask that the Department make the Best Interest Contract Exemption available for all plans,
not just small, non-participant-directed plans. The fiduciaries of all plans would benefit from
the option to use this exemption in connection with advice they receive. We note that further
revisions are necessary to this definition so as to not inadvertently exclude plan sponsors and
plan participants of “Keogh” plans which are not subject to Title | of ERISA but are “Plans”
subject to the prohibited transaction rules of Code Section 4975.

" We ask that the Department replace the warranties in the contract with contract terms. We
do not generally object to the substance of these provisions except for the revisions as noted
below, but we do object to their characterization as warranties. A contract provision binding
advisors and financial institutions equally serves the Department's purpose in providing a
framework to hold advisors accountable. While state law governing contract provisions is
reasonably uniform, allowing financial institutions and advisors some certainty in assessing the
potential legal liability presented by the exemption, some states treat a breach of warranty as a
tort rather than a contract dispute. This can result in significantly different litigation risks and


programs. The topic of statutory employee programs was something that the Department requested
more information on at the August 24 meeting. Please see attached Appendix C for more details about
insurance company statutory employees.

e Anannuity-specific definition of a “material conflict of interest” that would make clear that an insurance
commission that is higher than a mutual fund commission or that is initially higher than a fee-based
compensation arrangement is not by itself evidence of a conflict of interest.

© Disclosures that are tailored to annuity products. This disclosure would cover a description of the contract
and its benefits, advisor compensation (defined as insurance commissions), other payments to the advisor
or the selling firm, compensation to the insurance company (other than “spread”, see below), product
manufacturer affiliations and contract charges.

e Inresponse to the Department’s questions about insurance company “spread” at the August 24 meeting,
we propose that insurance company “spread” be expressly excluded from the disclosure requirements
and the “reasonable compensation” definition, because it is not something that can be known or
quantified over any particular period. For example, in the case of a fixed annuity, or the fixed component
of a variable annuity, spread is the difference between the fixed return credited to the contract holder
and the insurer’s general account investment experience. The spread can be positive or negative and is
not known in advance, or at any point in time during the life of the contract. Until the insurer’s
performance under the contract is complete, it will not know whether it has lost money, covered its costs
or perhaps gained a profit on that contract. As noted by the ACLI in its July comment letter (at page 36),
spread is earned by financial institutions on a wide range of products (e.g., bank deposits), and is more
appropriately thought of as investment earnings as opposed to compensation. As the ACLI points out, the
Department has agreed with this in other regulatory contexts and should also do so here.’

We also propose several changes to the BIC exemption for all products sold in reliance on it, including annuities.
The intent of these proposed changes is to greatly simplify it and remove unnecessary administrative burdens so
that firms will be able to use the BIC exemption to cover the sale of all retirement investment products, including
annuities. Many of these are changes that were specifically requested by Lincoln and other individual insurance
companies, as well as industry groups, during the comment period that ended in July. The attached mark-up in
Appendix B provides more detail about these proposed changes and supporting rationale.

Thank you for the opportunity to comment on this important initiative.

Sincerely,

bons Low

Dennis R. Glass
President and Chief Executive Officer
Lincoln Financial Group

7 See Qand A 22 of the 2009 Form 5500 Schedule C Frequently Asked Questions (which has been interpreted to require
disclosure on Schedule C of reductions in an insurance contract's crediting rate to cover plan recordkeeping expenses, but to
not require disclosure of spread). See also DOL Regulation Section 2550.408b-2(c)(1)(iv)(E) and (F) which require disclosure of
operating expenses only for investments that do not have fixed returns, and DOL Regulation Section 2550.404a-5(d)(1)(iv)(B),
which requires only disclosure of “shareholder-type fees” such as surrender charges, and liquidity restrictions.

Page | 5


Appendix B

(c) An **Asset,'' for purposes of this exemption, includes cash, securities,
XIV
and other property. Lythe fel g investment products: Bank
deposits; ti fieat ea ee tep hare tae ‘ «
: cement 2 __bank-colieeti as;—4 . ‘
‘ if breaded REEP braded fund ze_bond
nes7 ag r Ag £ 7 2
< ‘ i i ‘ + under £4 + of
pus g ¥
4933, - set eit det iy SINRA Red 1942 &
s —os-2 eurit defined in PINRA-Red 3
ve , q-annuity tracts;_guaranteed emont
eeact ve ibhin th ¢ 19 CFR 205th
7 7 er e ag 4 :
ax go-traded securities within th anind 13 CER 600
Reeluded £ this defi 6a ‘ arity that eurity
yrequity y tt
fue all stradd 2h 4 am
7 7 S S s g
equit bey fe dying -anequit yt eh ehout

(d) 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 would exercise based on the investment
objectives, risk tolerance, financial circumstances, and needs of the
Retirement Investor, and that places the interests of the plan or IRA
ahead of the financial or other interests of the fiduciary and its

affiliates withews regard to the = cher a
d Pinaneie) pnctitess ny _Aéfitiate, Related atityy cher

(e) °*Financial Institution'' means antke entity that is an “affiliate” (as
defined in ERISA regulation section 2510.3-21(£) (7) of the Adviser who,
together with the Adviser, functions as a fiduciary under ERISA for

KV
purposes of the covered transaction. empheys 4 her
ad individual a evact £ Letexed
ret PE T oS* Ft
‘ 4-that—
sep +
3} Registered-as sestment ander the Tavest : et
£1949 45 4,56, -e0b-1et dex the the state +
hnieh the adv intat ineipal effi aes £
wh eae e rs sap: £
pusiness+
bant mila £4 ial eitut ised eh a
42 eo
eat eat 2 4 £4 defined =
ing
bb) 11) of the Federal BD. Let . 42-5 4972)
= res r
but_only if the-advi Leis. th eats ided
eh poe peust dd emote the ban Lax £3 tak
s Pe = finer
eit Lat by is subject
as = sect
saat 2 iow by federal bate bark = .
seine }
. Lising be doe busi dex thet €
i # =
tat ded thats ins
7 pe + pany+
# peained ei fieate of Auth hein nee
£ ited sg tate whieh Lehex been



Appendix B

Department clearly state that there is no change in how such fees, compensation, investment
returns and so forth are calculated. Without this clarification, we are concerned that courts
and others will apply different definitions, such as treating spread as a form of disclosable
compensation, substituting their judgment for the Department’s considered determinations
regarding insurance products reflecting decades of careful study. See Q and A 22 of the 2009
Form 5500 Schedule C Frequently Asked Questions (which has been interpreted to require
disclosure on Schedule C of reductions in an insurance contract’s crediting rate to cover plan
recordkeeping expenses, but to not require disclosure of spread). See also DOL Regulation
Section 2550.408b-2(c)(1)(iv)(E) and (F) which require disclosure of operating expenses only for
investments that do not have fixed returns, and DOL Regulation Section 2550.404a-
5(d)(1)(iv)(B), which requires only disclosure of “shareholder-type fees” such as surrender
charges, and liquidity restrictions.

x We ask that the Department modify the language to reflect the traditional forms of
commission-based compensation paid by insurance and annuity contracts, and our suggested
language ensures that such commissions are consistent with acting in the best interest of the
advice recipient. The timing of the payments related to insurance products should not put
them at a disadvantage relative to compensation methods for fee-based advice. As discussed
above, the traditional insurance commission results in lower costs for the advice recipient over
the life of the contract than would a typical fee-based advice arrangement. Our language
permits these traditional compensation methods but ensures that the best interest of the
advice recipient is put first. We also suggest language addressing the need for statutory
employees to receive employee benefits. These traditional employment arrangements are
common in the insurance industry, and are expressly addressed in the Tax Code. The proposed
exemption could have made the employee benefits received by these employees a form of
prohibited compensation—this suggestion ensures these employee benefits can be provided.
As these benefits are not linked to any particular contract or investment, there is no reason for
the Department to perceive these employee benefits as presenting a conflict of interest.

XIII + .
We ask that the Department provide a transition rule in the exemption that protects the

expectations of participants, IRA owners, advisors and financial institutions, all of whom made
valid contracts under current law. Those reasonable expectations are thwarted if the
Department mandates reformation of all existing contracts. While we appreciate the idea of
the “grandfather” clause in the exemption, it must be modified to in several respects. First,
rather than permitting arrangements to continue only until they result in new advice, the
exemption should permit all existing arrangements prior to the applicability date to continue
until their expiration or renewal. This will provide an orderly transition, as all new contracts
must abide by the new rules, and all renewed arrangements must abide by the new rules. This
both preserves the expectations of participants and IRA owners and ensures rapid adoption of
the new rule.


Appendix B

(3) A plan sponsor as described in ERISA section 3(16)(B) (or any
employee, officer or director thereof), of a ted
Plan subject to Title I of ERISA-theat—hes—fevex than 108

+ , to the extent it acts as a fiduciary with authority to
make investment decisions for the Plan.

(m) °*Third-Party Payments'' mean sales charges when not paid directly by the
Plan, participant or beneficiary account, or IRA, 12b-1 fees and other
payments paid to the Financial Institution or an Affiliate or Related
Entity by a third party as a result of the purchase, sale or holding of
an Asset by a Plan, participant or beneficiary account, or IRA.

XVI

up py the Department; oF 1 tastitubion thatsel =
4 pee - +
2 shali-p ; = :
_ the i L ¢ th © the-fo12
sons ; = - qacst; Selioving
coematian fon th 4 a
- = g yeax period:
ener ne the Pinaneial rnetitution level £ _ = surchased;
yh _ ag identity of oh ae
ayes : s
2h ee-doH be ipyested-and-th to the Pl
. oe bance : Led withth
— e = syae ; F
ay qby the } gnaeeeue qany vias
© enue 4 y
: mane nase of each a ara
dy the identity of each sever . ctu) func, —mubusl£
ad ae a . ca
jand tt : . paid
2 he E Lal Institution level £ . e-eola; =
no . per_of dontity of-sh : ta
t qgeegate+ é x
ch te-doll . ved_and_th = to the
6 - 7
a Loe benefice: i" TRA aa
paxtieip : -
oh dey the at Institut any REfiLit
ce the aie of cach . eed»
ees - ;
end
14 Phe identityof up -mutual_ fund; mutual fund
i" atk : ©
: : . P
dela eke & + tastitut _ 7 held at
tet + = ay
Lime a hears
- quate



Appendix B

compensation payable with respect to another investment product
or service shall not be evidence of a conflict of interest.

(e) Disclosures. In addition to the disclosures required in Section Ill,
prior to the execution of a transaction involving an insurance or annuity
contract, the Adviser furnishes to Retirement Investors who are IRA
owners, the following information in writing and in a form calculated to

he understood by a plan fiduciary who has no special expertise in
insurance or investment matters:

(1) If the agent, broker, oF consultant is an Affiliate of the insurance
company whose contract is being recommended, or if the ability of the
agent, broker or consultant to recommend insurance or annuity
contracts is limited by any agreement with the insurance company, the
nature of the affiliation, limitation, or relationship;

(2) The Insurance Commission, expressed as a percentage of gross annual
premium payments for the first year and for each of the succeeding
wcnewal years, that will be paid by the insurance company to the
agent, broker or consultant in connection with the purchase of the
recommended contract;

(3) A description of any charges, fees, discounts, penalties or
adjustments which may be imposed under the recommended contract in
connection with the purchase, holding, exchange, termination or sale
of the contract ,

(4) A website as described in 29 CFR 2550.404a-5(d).

(£) Broad Service Provider Relationships. In addition to prohibiting
fiduciaries from receiving compensation from third parties and compensation
that varies on the basis of the fiduciaries’ investment advice, ERISA and the
Internal Revenue Code prohibit the purchase by a Plan, participant or
beneficiary account, or IRA of an insurance or annuity product 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
purchase an Asset that iis an insurance or annuity contract in accordance with
an Adviser's advice, from a Financial Institution that is an insurance
company and that is a service provider to the Plan or IRA. This exemption is
provided because purchases of insurance and annuity products are often
prohibited purchases and sales involving insurance companies that have a pre~
existing party in interest relationship to the Plan or TRA.

| (gb) Covered transaction. 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 a fiduciary's
causing the purchase of an Asset that is an insurance or annuity contract
py a-nen-participant-diecsed Plan subject to Title I of ERISA-tkat—has
£ ih = participants, participant or beneficiary account, or IRA,
from a Financial Institution that is an insurance company and that is a
party in interest or disqualified person, if:

(1) The transaction is effected by the insurance company in the ordinary
course of its business as an insurance company;



Appendix B

(b

(c

)

hold anthe Asset;7_or rollover or otherwise distribute Assets from a Plan
or IRA; the Adviser or end—Financial Institution will enter into a written
contract with the Retirement Investor, or will provide a written
unilateral contract to the Retirement Investor, that incorporates the
terms required by Section II(b-d). The terms of sSuch contract—#s

Leed bef £5 a = quis = will

= = Z

apply to any advice or other services provided prior to the execution of

the transaction, to the extent that the transaction is directly related to
It

or the result of such advice or other services.

Fiduciary. The written contract affirmatively states that the Adviser and
Financial Institution are fiduciaries under ERISA or the Code, or both,
with respect to any investment recommendations for which compensation is
received by the Adviser and Financial Institution, to the Retirement
Investor.

Impartial Conduct Standards. The Adviser and the Financial Institution

affirmatively agree to;—and-complywithy the following:

(1) When providing investment advice to the Retirement Investor regarding
the Asset, the Adviser and Financial Institution will provide
investment advice that is in the Best Interest of the Retirement
Investor (i.e., advice that reflects the care, skill, prudence, and
diligence under the circumstances then prevailing that a prudent
person would exercise based on the investment objectives, risk
tolerance, financial circumstances, and needs of the Retirement
Investor, and that places the interests of the plan or IRA ahead of
the financial or other interests of the fiduciary and its

T
affiliates. ithout gard-to—the £ eial th int + £
‘he Adviser, Fi ta} Tastitet gfiliate, Related Entity;

(2) When providing investment advice to the Retirement Investor
regarding the Asset, the Adviser and Financial Institution will
not recommend an Asset i

(A) In the case of an Asset that is not an annuity contract,
the total amount of compensation anticipated to be received
by the Adviser, Financial Institution, Affiliates and
Related Entities in connection with the purchase, sale or
holding of the Asset by the Plan, participant or
beneficiary account, or IRA will exceed reasonable
compensation in relation to the total services they provide
to the Retirement Investor; or

(B) In the case of an Asset that is an annuity contract, the
compensation does not meet the requirements of Section
Vic).

(3) The receipt of commission-based compensation and other standard
and customary compensation practices shall not be considered a
violation of 11(c) where such compensation is otherwise

Vv
reasonable.



Appendix C — Statutory Employee Information

tax from the statutory employee’s compensation and pay the corresponding employer tax. The statutory
employee is not required to pay SECA tax on that compensation.

Background on “Full-Time Life Insurance Salesman”
Definition

A “full-time life insurance salesman” (“FTLIS”) is one of the occupational categories of statutory
employees. A FTLIS is defined by Treasury Regulations as “An individual whose entire or principal
business activity is devoted to, the solicitation of life insurance or annuity contracts, or both, primarily for
one life insurance company.” Internal Revenue Service guidance provides that an insurance agent will
be deemed to be a FTLIS agent when, “pursuant to the terms and conditions of his arrangement with the
life insurance company or its general agent, it is mutually agreed or clearly contemplated by the parties
that the salesman’s entire or principal business activity is the solicitation of application for life insurance or
annuity contracts...for the life insurance company.”* Insurance companies making a determination as to
whether an agent meets the FTLIS requirements will look to the terms of his or her agreement and may
use production tests based on sales of the company’s proprietary products as a factor to confirm that an
agent is, in fact, acting in accordance with his or her agreement.

The FTLIS definition is geared towards “career agents” of insurance companies who sell the proprietary
products of their career company. As described in MassMutual's comment letter regarding the proposed
fiduciary rules submitted July 21, 2015, “career agents agree to primarily represent one insurance
company and principally sell and service that company’s insurance and annuity products...career agents
also receive substantial training and education support from the insurance company they represent. The
career agent model seeks to foster a long-term relationship between the insurance company and its
customers ~— a relationship that is maintained by a highly-trained, well supervised agent and that is
beneficial to both the customer and the company.”

Receipt of Benefits by FTLIS Agents

Tax Code Section 7701(a)(20) recognizes the unique relationship between FTLIS agents and their
associated insurance companies and furthers a strong public policy in favor of providing health and
welfare benefits to the working American public by providing that FTLIS agents are treated as if they were
employees of their associated insurance company for purposes of certain tax-qualified benefit plans
including group-term life insurance plans, accident and health plans, pension and 401(k) plans and
cafeteria plans. Accordingly, FTLIS agents are eligible for these benefits despite the fact that they are
independent contractors and would not otherwise be permitted to participate in these plans.

Life insurance companies with FTLIS agents rely on this provision of the Tax Code to provide their FTLIS
agents with qualified health, welfare and retirement benefits. For example, a company may allow FTLIS
agents to participate in their qualified health, welfare and retirement plans and may provide 401(k)
employer contributions or life insurance and disability insurance coverage based on the amount of the
agent's proprietary commissions. A company may also use FTLIS status as a basis for eligibility in
nonqualified plans such as nonqualified deferred compensation plans or equity programs.

Concern Related to the Best Interest Contract Exemption (“BIC Exemption”)*

Concern

® Treasury Regulation Section 31.3121(d)-1

5 IRS Revenue Ruling 54-312
* Note that the concerns and proposed solutions discussed herein relate solely to the conflict between the proposed
BIC Exemption and the Tax Code provisions related to Full-Time Life Insurance Salesmen. Other concerns and
proposed solutions related to the exemption have been addressed in separate comment letters submitted by
members of this group.



Appendix A — State Insurance Company Requirements

2)

3)

Annual, audited financial statements must be filed in conformity with statutory
accounting practices prescribed or otherwise permitted by the department of insurance.
Therefore, insurance companies must typically prepare two types of audited financial
statements each year—Statutory and GAAP Financials. Insurance companies’ outside
auditors need to be familiar with both types of accounting practices.

Additional insurance department reporting is required if the insurance company is part
of a holding company.


Appendix A — State Insurance Company Requirements

A. Although each state has specific statutes and regulations that apply to companies domiciled in
that state, the following outline provides general guidance on requirements to become licensed
as an insurance company with a state insurance department.

B. Insurance companies must:

1)

2)

3)

4)

Meet financial requirements for capital and surplus, with additional financial
requirements if the company is issuing variable contracts.

Submit and have a plan approved by the insurance department for incorporating,
promoting and raising capital.

Submit and have approved by the insurance department, a business plan, which
demonstrates that: a) the insurance company can conduct and transact business in a
safe and prudent manner, b) the insurance company can maintain the company in a safe
and solvent condition, and c) the company has established safe and sound methods for
the conduct of such insurance company and its business and prudential affairs.

Submit a plan of operations for variable business, which will not be approved until the
insurance commissioner has found that: a) the plan is not unsound b) the general
character, reputation and experience of the management and those proposed to supply
consulting, investment, administrative or custodial services are would allow the
insurance commissioner to reasonably assume competent operation c) the present and
foreseeable future financial condition of the insurer and its method of operation in
connection with the issuance of such policies is not likely to render its operation
hazardous to the public or its policyholders.

C. To do business in states other than the state of domicile, a company needs to follow the
requirements of each state in order to be approved to conduct insurance business and to issue
variable annuity contracts. States will each have requirements for variable annuity contracts
and all contracts must be filed and approved by a state’s insurance department before the
contracts are available for sale to consumers in that state. Actuarial Memoranda are usually
required to support the contract filings and contain: a high level description of the contract,
how the contract satisfies non-forfeiture requirements, the reserving basis and in many states,
examples of the mechanics of the contract.

D. Onan ongoing basis, an insurance company must:

1)
2)
3)

Follow rules set out by the insurance departments for conducting its business

Submit to regular financial examinations by the domiciliary insurance department
Submit to various exams from other state insurance departments where the company is
authorized to do business.

E. Additional Requirements:

1)

Insurance companies must file an annual statement on the National Association of
Insurance Commissioners (NAIC) Annual Statement Blank. This is unique to insurance
companies and provides for consistent reporting across companies.

1


Appendix B

(2) The combined total of all fees, ne eH +4 S aby
the insu emee and > filiate 4 e s—6£
= ce deny AE —
seascnabl sats dere 4 mgtances Insurance

2 +
Commissions (as defined in PTE 84-24), Mutual Fund Commissions
(as defined in PTE 64-24) and other consideration received b
the insurance agent or broker, pension consultant, insurance
company, or investment compan: Principal Underwriter (as
defined in PTE 84-24):

(A) for the provision of services to the plan or IRA; and

(B) in connection with the purchase of insurance or annuity
contracts or securities issued by an investment company

js not in excess of “reasonable compensation” as described in Section
Ti(c) of this Exemption

(3) The purchase is for cash only; and

(4) The terms of the purchase 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.

| (he) Exclusion: The exemption in this Section VE does not apply if 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.

| Section VIE--Exemption for Pre-Existing Transactions

(a) In general. ERISA and the Internal Revenue Code prohibit Advisers,

(b

Financial Institutions and their Affiliates and Related Entities from
receiving variable or third-party compensation as a result of the
Adviser's and Financial Institution's advice to a Plan, participant. or
peneficiary, or IRA owner. 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, dn 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, such as 12b-1 fees, in
connection with the purchase, sale or holding of an Asset by a Plan,
participant or beneficiary account, or an IRA, as a result of the
Adviser's and Financial Institution's advice, that occurred prior to the
Applicability Date, as described and limited below.

covered transaction. Subject to the applicable conditions described
below, 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), shall not apply to the receipt of
compensation by an Adviser, Financial Institution, and any Affiliate and



Appendix B

(3) A plan sponsor as described in ERISA section 3(16) (B) (or any |
|

employee, officer or director thereof) of a a_non-partieipant-disested
Plan subject to Title I of ERISA-with—fey 4100-particip: 1 to
the extent it acts as a fiduciary who has authority to make

I
investment decisions for the Plan.—

As detailed below, parties seeking to rely on the exemption must
contractually agree to adhere to Impartial Conduct Standards in rendering

advice regarding Assets and to contractually agree to adopt +74 warrant
that they have-adepted policies and procedures designed to mitigate the
dangers posed by Material Conflicts of Interest; disclose important
information relating to fees, compensation, and Material Conflicts of
Interest; and retain documents and data relating to investment
recommendations regarding Assets. 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), (EB) and (F). The Adviser and Financial Institution must |
comply with the conditions of Sections II-V (as applicable) to rely on |
|

this exemption.
(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 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 a transaction in which
the Adviser is acting on behalf of its own account or the account of
the Financial Institution, or the account of a person directly or
indirectly, through one or more intermediaries, controlling,
controlled by, or under common control with the Financial Institution
(i.e., a principal transaction);

(3) 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

(4) The Adviser (i) exercises any discretionary authority or
discretionary control respecting management of the Plan or IRA assets |
involved in the transaction or exercises any authority or control |
respecting management or disposition of the assets, or (ii) has any |
discretionary authority or discretionary responsibility in the
administration of the Plan or IRA.

Section II--Contract, Impartial Conduct, and Other Requirements
(a) Contract. Prior to or reasonably contemporaneous with executing an

covered transaction resulting from a recommendation that secemaending thet
the Plan, participant or beneficiary account, or IRA purchase, sell or



Appendix B

standards from state to state. This additional uncertainty does not provide additional
protection to participants and IRA owners, but it does increase the costs they ultimately bear,
and reduces the likelihood that the exemption will be used as the Department intends.

" We ask that the Department clarify that the contract may be provided prior to execution of a
transaction and apply retroactively to preceding discussions, rather than being required before
any substantive discussions have taken place. We believe this change will be important in
making the exemption useful for participants and IRA owners, who otherwise will be unlikely to
sign a contract their advisor requires, especially as the participant or IRA owners may not yet
even have decided to engage the advisor. We also ask that the proposed language be modified
to permit a unilateral contract presented by and binding on the advisor or financial institution.
We believe this alternative is necessary to better serve the needs of participants and IRA
owners. A unilateral contract is equally enforceable and it must contain all of the same
provisions, but it does not require obtaining a physical or electronic signature from the advice
recipient, something that can pose a logistical challenge and become an unnecessary barrier in
practical operations.

Nv We ask that the Department modify the language describing the Best Interest standard as we
have indicated. The “without regard” language is simply too restrictive to permit proprietary
funds or common compensation arrangements, such as commissions related to insurance
contracts and annuities, that the Department intends the Best Interest Contract Exemption to
permit within the framework of the exemption. The suggested language captures the
Department’s purpose in proposing the exemption, and requires that the client’s interests be
put before the advisor’s interests.

v We ask that the Department modify the exemption language to expressly permit the
reasonable and customary use of commissions to compensate advisors recommending annuity
contracts. The traditional insurance commission is actually less costly over the term of the
contract than a typical investment advice fee would be—the fact that a larger portion of that
commission is paid at the time of the sale should not be the basis for a bias against insurance
and annuity products in the exemption.

vl We ask that the Department remove this condition because it does not provide any
additional safeguards for participants and IRA owners as advisors and financial institutions must
already comply with applicable laws. Our concerns is that these laws include a great many
details that are completely unrelated to the Department’s concerns regarding conflicts and
acting in the best interest of the advice recipient. Given the sheer scope of such laws, it is very
likely that minor compliance issues unrelated to any conflict, and that can cause no harm to the
advice recipient, will periodically be the subject of enforcement actions by the wide array of
Federal and State regulators. For example, a securities, insurance or bank examination is likely
to result in minor corrections of various kinds in the normal course of operations for nearly


f j Lincoln Lincoln National Life Insurance Company

Financial Group* 150 N. Radnor-Chester Road
Radnor, PA 19087-5221
You're In Charge*

September 24, 2015

Filed Electronically

Office of Regulations and Interpretations Office of Exemption Determinations
Employee Benefits Security Administration Employee Benefits Security Administration
U.S. Department of Labor U.S. Department of Labor

200 Constitution Avenue, NW, Room N-5655 200 Constitution Avenue, NW, Suite 400
Washington, DC 20210 Washington, DC 20210

Re: Definition of the Term “Fiduciary:” Conflict of Interest Rule (RIN 1210-AB32)
Proposed Amendment to Proposed Partial Revocation of Prohibited Transaction Exemption 84-24
(ZRIN 1210-ZA25)
Proposed Best Interest Contract Exemption (ZRIN 1210-ZA25)

To Whom It May Concern:

Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates (collectively,
“Lincoln”). Lincoln is pleased to have this opportunity to provide additional comments on the Department of
Labor’s (“Department’s) proposed fiduciary advice regulation and related prohibited transaction exemptions (the
“Proposal”). We appreciate the Department's efforts to understand the life insurance industry’s questions and
concerns about the Proposal and to work with us to address the Proposal’s unintended consequences that would
limit consumers’ access to critical lifetime income guarantees.

In this regard, we appreciate Department Secretary Perez’s time in attending the July 30" meeting with Jeffrey
Zients, Director of the President’s National Economic Council, and several representatives of the U.S. Chamber of
Commerce. We also appreciate the Department's follow-up meeting with representatives from Lincoln and
several other insurance companies on August 24. These meetings were extremely helpful in giving us greater
insight into the Department's goals, and also allowed the Department to gain a better understanding of annuities,
including how they differ from other retirement investment products.

This letter will respond to a number of specific requests for additional information by the Department at the
August 24 meeting. It also will cover the following topics:

e We continue to emphasize the arguments made in our July comment letter, as well as the letters
submitted by industry groups such as the American Council of Life Insurers (ACLI), the Insured Retirement
Institute (IRI) and the Committee of Annuity Insurers (CAI), that Prohibited Transaction Exemption (PTE)
84-24 should continue to cover variable IRA annuity sales, along with other insurance products, as it has
for the last 30+ years. The Department’s stated basis for its proposal to remove variable IRA annuity sales
from its scope and to lump them in with mutual funds and other non-guaranteed investment products
under the Best Interest Contract (BIC) exemption is that they are registered securities. This justification to
move variable annuities out of PTE 84-24 does not make sense because, as we discussed, the SEC and
FINRA treat variable annuities differently from mutual funds under the securities laws. See, for example,

©2015 Lincoln National Corporation
www.LincolnFinancial.com

Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.
Affiliates are separately responsible for their own financial and contractual obligations


Appendix B

(2) Inform the Retirement Investor that the Retirement Investor has the
right to obtain complete information about all the fees currently
associated with the Assets in which it is invested, including all of
the direct and indirect fees paid payable to the Adviser, Financial
Institution, and any Affiliates; and

(3) Disclose to the Retirement Investor whether the Financial Institution
offers Proprietary Products or receives Third Party Payments with
respect to the purchase, sale or holding of any Asset, and, if
applicable, of the address of the Web site required by Section
TII(ea) that discloses the compensation arrangements entered into by
Advisers and the Financial Institution.

(£) Prohibited Contractual Provisions. The written contract shall not contain
the following:

(1) Exculpatory provisions disclaiming or otherwise limiting liability of
the Adviser or Financial Institution for a violation of the
contract's terms, except that the contract ma require the exhaustion
of mediation or arbitration prior to filing any claim in a court of
Taw; and

(2) 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 except as provided in paragraph (f) (1)

Section III--Disclosure Requirements

(a) Transaction Disclosure. 41}-Bisclesure--Prior to the execution of the
transaction involving purckasef-antke Asset by a Retirement Investor,

and periodically thereafter (as applicable under the option selected) for

as long as the exemption applies, —the-Plen;—participant ez benef
aeceunt)_oF ERA, the Adviser furnishes:te—he—Retirement +t £ ce
shat 2 Ley ‘ b ‘ ged,—the Total fan
hat—p 7 e : 7 1Ces
ehe Bi veipant benefies ‘ =p £4 ping int
e S 7 gis
+ for 1-5 a4 a aas_adel aid
7 = pres
assuming i tment of +he—del ‘ ded_by the Ades a
. . Ix
51 24 pout cement that a at
e ets perfor .
(1) Plan Disclosures. To Retirement Investors who are participants OF
beneficiaries of a Plan, disclosures required by 29 CFR 2550.404a-
5 (d); or She -dised hast _eequized by thi a ced-net_b
provided +ith peet—te_a-subsequent dation _to—pureh che
emont product if the-chart previously provided tothe
Reti et ‘ Lihin_thepast twelve-month the Total Cost
ha a lig eh 2
ty s

(2) IRA Disclosures. To Retirement Investors who are IRA owners:

(A) For Assets that are registered as securities under the Securities

Act of 1933, as amended, fee information and comparative chart (s)
required for purposes of Securities and Exchange Commission Form
N-iA (open-end management investment companies) or Form N-3 ox No

|
|



Appendix B

| (24) The Adviser's and Financial Institution's statements about the
Asset, fees, Material Conflicts of Interest, and any other matters
relevant to a Retirement Investor's investment decisions, will not be
misleading.

(d) WaesantiesPolicies and Procedures; Conflict Mitigation. The Adviser and
the Financial Institution will adhere to the following: afftematively

1) the Ad Fi Ingtitubion, and Affitiat rn = ch
a Lisable federal and-state a am € the

PP Heg s ing ©

tment ad © " 4 a-held £ th and

7 e Sey s 7

b £ of 7 lated to—th 5 3 held

the-pay 7 - ~ ag
VI

(21) The Financial Institution has adopted written policies and
procedures reasonably designed to mitigate the impact of Material
Conflicts of Interest and ensure that its individual Advisers adhere
to the Impartial Conduct Standards set forth in Section Il (c);

| (32) In formulating its policies and procedures, the Financial
Institution has specifically identified Material Conflicts of
Interest and adopted measures to prevent the Material Conflicts of
Interest from causing violations of the Impartial Conduct Standards
set forth in Section II(c); and

(43) Subject _to the provisions of paragraph (1) above, nNeither the
Financial Institution nor (to the best of its knowledge) any
Affiliate or Related Entity will use #ses-quotas, appraisals,
performance or personnel actions, bonuses, contests, special awards,
ditt ted ‘P + sor other actions or incentives—te—the
extent —theyweuld tend-te— which the Financial Institution reasonabl
pelieves will encourage individual Advisers to make recommendations
that are not in the Best Interest of the Retirement Investor_as
defined in Il(c). Notwithstanding the foregoing, —the-sentractuat

ant = forth Shs " trig it} —a . ‘
= . 2 the

Financial Institution or its Affiliates and Related Entities may from
provideing Advisers with differential compensation (whether in type
or amount; and, including, but not limited to, commissions and/or
ongoing asset-based compensation), based on investments by Plans,
participant or beneficiary accounts, or IRAs, provided that the
Financial Institution maintains policies and procedures calculated,
based upon the Financial Institution’s reasonable belief and in
consideration of other applicable laws governing any recommendations,
to avoid encouragingte—=h sort sek = ai 44 4
enecurage advice that runs counter to the Best Interest of the
Retirement Investor as defined in Il(c). For example, —terg-r
differential compensation_would be permissible if based on customary

commission ractices. would be-pesmissibtet;

(e) Disclosures. The Retirement Investor must be provided, prior to or
concurrent with the execution of any covered transaction resulting from a
recommendation described in I(a), a document that written-centract—must
specifically:

(1) Identify and disclose any Material Conflicts of Interest;



Appendix C — Statutory Employee Information

We are concerned that the BIC Exemption could be construed to preclude life insurance companies with
career agents who sell to retirement investors from providing important health, welfare and retirement
benefits to the agents and their families, effectively nullifying the FTLIS provisions of the Tax Code for
those agents. As further described below, this concern derives from the exemption’s formulation of “Best
Interest,” and the warranty and range of investment options requirements. We believe these
requirements could be construed to fundamentally conflict with FTLIS status for agents selling to
retirement investors in various ways.

First, the BIC Exemption requires that the adviser affirmatively agree to provide investment advice that is
in the “Best Interest 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.” The phrase “without regard
to” could be construed in litigation or arbitration to prohibit the sale of proprietary products to retirement
investors entirely.

Second, the BIC Exemption requires that the BIC include a warranty stating that the financial institution
does not use “quotas... differential compensation or actions or incentives to the extent they would tend to
encourage individual Advisers to make recommendations that are not in the Best Interest of the
Retirement Investor.” This warranty could be construed to prohibit insurance companies from looking at
production tests based on proprietary sales (including such sales to retirement investors) as a factor in
determining FTLIS status because a company doing so could be accused of implementing a quota that
tended to encourage an adviser to recommend a proprietary product. The warranty could similarly be
construed to prohibit insurance companies from providing benefit plan coverage based on proprietary
sales (including such sales to retirement investors) in accordance with the Tax Code.

Third, the BIC Exemption provides that an adviser must make available “a range of assets that is broad
enough to enable the Adviser to make recommendations with respect to all of the asset classes
reasonably necessary to serve the Best Interests of the Retirement Investor.” This requirement could be
construed to prohibit insurance agents selling to retirement investors from agreeing with an insurance
company that their entire or principal business activity will be devoted to the solicitation of proprietary life
insurance and annuity products, the very definition of a FTLIS agent.

Proposed Solution

We have provided proposed solutions to these issues in our proposed markup to the BIC Exemption in
Appendix B attached to this comment letter.



Appendix B

Recommended Revisions of the Best Interest Contract Exemption
To Address the Unique Issues Presented by Insurance Products

We appreciate the Department’s recognition of the important role of guaranteed income through
annuities in retirement planning for America’s workers. As insurance products, variable
annuities provide valuable lifetime guarantees, even though they are also registered

securities. Because of this, the features of and compensation related to variable annuities are
materially different from mutual funds and other types of securities, for which the Best Interest
Contract Exemption appears primarily to have been designed. Accordingly, we would prefer to
address the Department’s specific concerns about individual variable annuities in the context of
revisions to PTE 84-24. However, in the event the Department will not agree to this, we have
developed changes to the Best Interest Contract Exemption for the Department’s consideration.

The following proposed changes to the exemption text are intended to achieve two primary
objectives. First, these changes recognize and address the real differences presented by variable
annuities, amending the securities-focused language to address these unique concerns. Without
these changes, we believe the exemption as Proposed would severely disadvantage variable
annuities in the marketplace, undermining the Department’s goal of ensuring retirees have access
to and the choice of guaranteed income solutions through variable annuities. Second, we suggest
more general changes to the exemption to facilitate its wider use by advisors.

Redline of the Best Interest Contract Exemption Proposed Text with Endnote Explanations

Section I--Best Interest Contract Exemption

(a) In general. ERISA and the Internal Revenue Code prohibit fiduciary
advisers to employee benefit plans (Plans) and individual retirement
plans (IRAs) from receiving compensation that varies based on their
investment recommendations. 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 their 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 for services provided in connection with a purchase, sale or
holding of an Asset by a Plan, participant or beneficiary account, or IRA,
as a result of the Adviser's and Financial Institution's advice to any of
the following **Retirement Investors:''

(1) A participant or beneficiary of a Plan subject to Title I of ERISA
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


Appendix B

Bi) # dexg é-shali a * dergo—a ath an |
dent a-pubt ta ee-Last leted
tndeper BeSe * Cone
taxable—yoar sexe ~ at thin the
: £ thei € : 3 bate) by the state!
c $s
4 5 a eh 4s
# t€—pE gS 7
tea led bate wh 1 that—act
€ * ee + etuae
pe_aondueted elly-by. tad € £
= ted +h a 4 |
+ < por + PE Pee + S = = YF =
as xo} deat gistered under thes & EuchangeAetof
4 ~ 49 5
a 45 BS+C+ <—seqe}
(£) °‘Independent'' means a person that:

(1) Is not the Adviser, the Financial Institution or any Affiliate
relying on the exemption,

(2) Does not receive compensation or other consideration for his or her
own account from the Adviser, the Financial Institution or Affiliate;

and

(3) 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.

(g) **Individual Retirement Account'' or **IRA'' means any trust, account or
annuity described in Code section 4975(e) (1) (B) through (F), including,
for example, an individual retirement account described in section 408 (a)
of the Code and a health savings account described in section 223(d) of

the Code.

(h) A **Material Conflict of Interest'' exists when an Adviser or Financial
Institution has a material financial interest that could affect the
exercise of its best judgment as a fiduciary in rendering advice to a
Retirement Investor regarding an Asset.

(4) ‘*plan'' means any employee benefit plan described in section 3(3) of the
Act and any plan described in section 4975(e) (1) (A) of the Code.

(j) *~°Proprietary Product'' means a product that is managed 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.

(1) ‘Retirement Investor'' means—
(1) A participant or beneficiary of a Plan subject to Title I of ERISA
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


Appendix B

XV We ask the Department to remove the list of assets eligible for the exemption. This list does
not provide any additional protection from conflict, and it requires all new products to seek an
individual exemption to be eligible for the Best Interest Contract Exemption. Given the pace of
innovation in annuity and insurance products as the industry tries to develop new and better
retirement income solutions that better serve the needs of participants and IRA owners, we are
concerned that some new products might be precluded from being utilized under the
exemption. As the individual exemption process is quite lengthy, this could significantly delay
introduction of new retirement income solutions to the marketplace.

* We ask that the Department modify the definition of financial institution so that only those
entities that are fiduciaries under the definition of fiduciary would be fiduciaries for purposes of
the exemption. Entities that, under the statutory definition of a fiduciary, would not be treated
as a fiduciary under the definition of fiduciary should not be required to accept such status
under the exemption.

xv The collection of investor-level information will be enormously expensive for service
providers, a cost that ultimately will be borne by the IRA owners. Advisor performance data is
not a proxy for the prudence of advice, and such performance data will be meaningless when
aggregated across different investors with different needs utilizing different investment
options. For example, providing advisor performance data does not make sense for annuity
products with guaranteed returns—the primary purpose of the product is providing guaranteed
retirement income, not generating “better” investment returns for IRA owners.


Variable Annuities Are Insurance Contracts And Are Legally And Fundamentally Different From Mutual Funds.

In the August 24 meeting, the Department expressed concern that if variable annuities were excluded from the
BIC exemption and covered under PTE 84-24, that mutual funds would be able to structure themselves as variable
annuities “in name only” to avoid the BIC exemption requirements. Again, this concern is misplaced and appears
to be based on a misunderstanding that variable annuities are the same as mutual funds. Variable annuities are
fundamentally different from mutual funds. The Investment Company Act of 1940 (the “1940 Act”) defines a
“variable annuity contract “as an “accumulation or annuity contract, any portion thereof, or any unit of interest or
participation therein pursuant to which the value of the contract, either prior or subsequent to annuitization, or
both, varies according to the investment experience of the separate account in which the contract participates.”
The 1940 Act further defines a “separate account” as an account established and maintained by an insurance
company pursuant to the laws of any state or territory of the United States, or of Canada or any province thereof,
under which income, gains and losses, whether or not realized, from assets allocated to such account, are, in
accordance with the applicable contract, credited to or charged against such account without regard to other
income, gains or losses of the insurance company.

As this definition makes clear, variable annuities are insurance contracts, which can only be issued by a duly
licensed insurance company. Insurance companies are highly regulated by the states, subject to state insurance
law and reserving requirements, and subject to supervision and examination by state insurance departments. The
contracts they issue are also subject to state review and approval. Because of this, it would be irrational for a
mutual fund company to become an insurance company for the sole purpose of availing itself of PTE 84-24 and
avoiding the BIC exemption requirements. For greater detail on the specific state insurance law requirements
applicable to insurance companies, please see attached Appendix A, as well as the comprehensive appendix
attached to the ACLI comment letter.

Proposed Changes To The BIC Exemption

In the alternative, if the Department concludes that the BIC exemption should be the only exemption available for
variable IRA annuity sales, we urge the Department to make changes to the BIC exemption that better reflect the
differences between annuities and other types of investment products that are covered under the BIC exemption.
These revisions are documented in attached Appendix B.

As expressed in the hundreds of pages of comments filed during the public comment period and during the public
hearings, the BIC exemption must be simplified so that firms that offer annuities can and will rely on it. We do not
believe that converting our businesses to fee-only advice models for all retirement savers is in their best interest.
Fee-based models do not fit with the way annuities are used by consumers. We propose that the Department
enhance Section VI° of the BIC exemption — the “Insurance and Annuity Contract” section that is already part of
the BIC exemption. These enhancements would include:

e Anannuity-specific definition of “reasonable compensation” that accounts for the value of the insurance
guarantees and other benefits inherent in an annuity product, and the extensive up-front consumer
education that is required for annuity product sales. This change would make clear that insurance
commissions that are higher than mutual fund commissions, or that are initially higher than fee-based
compensation, are reasonable provided they are consistent with customary compensation practices in the
annuity marketplace. It would also expressly permit insurers to maintain their “statutory employee”

© In the attached markup, the annuity section of the BIC exemption is Section V, because we propose removing Section IV of
the exemption entirely. See the attached BIC exemption markup at Appendix B for supporting rationale.
Page | 4


Appendix B

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ss 3 Sr 7 €
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Disclosure to the Department and Recordkeeping

| Section Iv-

(a) EBSA Disclosure. Before receiving compensation in reliance on the
exemption in Section I, the Financial Institution notifies the Department
of Labor of the intention to rely on this class exemption. The notice will
vemain in effect until revoked in writing by the Financial Institution.
The notice need not identify any Plan or IRA.

(b) Bate Req Phe FS } tretitet maintains the-data that
pject quest—p ae ‘ z : that —i ible
é seination_by 2h partment i the date ofthe
i" 53 + Lief d 8 ‘ i" han th
HEE feet : = 7
: 1 tastitutd ble £ Laps Leh ths
FE ia Pay ) r F F 7
Li be subject to the posed by ed & 1975 a it



Appendix B

(a)

In general. Insurance contracts and annuities are specialized investments
with unique features, such as guaranteed income, and compensation
structures that differ from many other securities. This exemption

therefore provides specific conditions related to these products.

Fees and Compensation. For the purposes of this exemption, the

la.

definition of compensation related to insurance contracts and annuities
for financial institutions and advisors shall be limited to those
commissions, fees, Charges and other forms of compensation required to be
disclosed under 29 CFR 2550.408b-2, 29 CFR 2550.404a-5, and PTE 84-24.
The receipt of commission-based compensation and other standard and
customary compensation practices (e.g., standard forms of revenue-sharing
based on either sales or assets under management; deferred compensation or
Subsidized health or pension benefit arrangements for career agents oF
other similarly situated individuals; reimbursement for reasonable and
necessary marketing, education and professional development expenses)
shall not be considered a violation of II(c) where such compensation is

. XI
otherwise reasonable.

Reasonable Compensation for Insurance Contracts and Annuities. In

(da)

providing investment advice regarding an insurance oF annuit
Sontract, the combined total of all fees, Insurance Commissions (as
defined in PTE 84-24), Mutual Fund Commissions (as defined in PTE
$4224) and other consideration received by the insurance agent oF
proker, pension consultant, insurance company, or investment compan
Principal Underwriter (as defined in PTE 84724) will not exceed
reasonable compensation in relation to:

(1) the value of the services provided to the Plan, participant or
beneficiary account, or IRA, and

(2) the value of the insurance guarantees or other benefits
led by the Asse

OV

Policies and Procedures; Conflict Mitigation. Commissions and

compensation related to the sale of an insurance or annuit contract shall
be provided pursuant to a policy and procedure designed to ensure such
commissions and compensation are?

(1)_paid in a manner that is reasonable and customary for such insurance
snd annuity contracts taking into account the total compensation
anticipated over the expected duration of the contract; and

(2) no more than reasonable compensation as described in II(c) (2).

(3)__Notwithstanding the foregoing:

(A) reasonable and customary deferred compensation or subsidized
health or pension benefit arrangements provided to the Adviser,
such as typically provided to an “employee” as defined in Code

Section 3121(d) (3) (a “statutory employee”) shall be considered
XIT
reasonable and customary under this section; and

(B) Provided the other requirements of this exemption are mety the
fact that an Insurance Commission may be higher than the



e FINRA Advertising Standards for variable annuities are set forth in IM-2210-2; which require identification
of the product as insurance, discussion of the long term nature of the product, prohibitions against
guaranteeing investment return, requirements for showing performance and rules for product
comparisons.

The Department Has Not Provided Adequate Rationale For Removing Variable IRA Annuities From PTE 84-24.

As annuities are treated differently from other investment products, it makes more sense for the Department to
have a set of prohibited transaction rules for annuities, including variable annuities, which recognizes the
differences between annuities and other investment products, just as the SEC and FINRA do, and as the
Department does with PTE 84-24 as currently written. The Department’s proposal now to no longer recognize
these differences for variable annuities is a serious step back from this sensible approach. It indicates a lack of
understanding about the insurance guarantees that variable annuities provide. As noted in our July comment
letter, over the last five years, 75% of the income guarantee benefits sold have been through variable annuities.°
These significant numbers show that variable annuities certainly are not just like mutual funds, stocks and bonds,
which have no income guarantees, and should not be treated the same as these other investments. We urge the
Department to recognize the significant differences between variable annuities and non-guaranteed investment
products by allowing PTE 84-24 to continue to cover variable IRA annuity sales.

If the Department declines to do this, we believe that a rationale based solely on the fact that variable annuities
are securities is insufficient and will be evidence of a continued misunderstanding about the nature of these
products. We are very concerned that this misunderstanding will result in a rule that will discourage firms and
advisors from recommending annuities, when they are in a consumer’s best interest, resulting in reduced
consumer access to critical guaranteed income products. It will also result in unnecessary consumer confusion
caused by differing sets of rules for variable IRA annuities and other annuities. The life insurance industry has
raised these concerns in its comment letters and in meetings with Department staff,’ but to date we have not
heard the Department articulate a reasonable basis for removing variable IRA annuities from PTE 84-24. We urge
the Department to reconsider its approach, in light of the substantial market disruption and harm to retirement
savers that would result.

Further, the continued availability of PTE 84-24 for variable IRA annuities is not the status quo. The proposed
changes to PTE 84-24, in particular the “best interest” standard of care contained in the exemption’s new
“impartial conduct standards” requirement, would provide enhanced consumer protections. As we and our
industry trade groups have stated in our earlier comment letters, we support a best interest standard for
retirement advice and believe that its addition to PTE 84-24 is workable, provided certain changes are made to
the “best interest” definition and other parts of the exemption to make it usable in the retirement market.”

° See page 6 of the Lincoln Financial Group comment letter submitted on July 21, 2015.

* See pp. 5—11 of the Lincoln Financial Group comment letter submitted on July 21, 2015, for a discussion of the importance
of variable annuities in the retirement market, and pp. 11 and 15—16 for a discussion of the ways in which the BIC exemption
as proposed would harm variable annuities and the consumers who need them.

° Changes are needed to the “best interest” definition in PTE 84-24 to make it consistent with the Department’s own public
statements about the meaning of this term, and to make the revised exemption usable. In addition, changes to other parts of
PTE 84-24 are necessary in order for this exemption to continue to have utility in the retirement market, including changes to
the definition of “insurance commission” and other parts of the exemption so that it covers all forms of compensation
attendant to the sale of an annuity. For more specifics about these needed changes, please see pp. 11—15 of the Lincoln
Financial Group comment letter submitted on July 21, 2015), as well as the comment letters filed on behalf of the industry by
the ACLI (pp. 18—22), the IRI (pp. 33-34) and the CAI (pp. 20—23).

Page | 3


Appendix B

every financial institution. Causing all of those technical “foot faults” routinely addressed in
ordinary oversight interactions with various regulators to be a potential breach of contract,
despite no effect or harm on the advice recipient, results in significant legal risk related to the
contract. Such issues should not be a basis for liability under the contract, especially given that
compliance with all such laws is already required of every financial institution.

wu We ask that the Department modify the language to reflect the traditional forms of
commission-based compensation paid by insurance and annuity contracts, and our suggested
language ensures that such commissions are consistent with acting in the best interest of the
advice recipient. The timing of the payments related to insurance products should not put
them at a disadvantage relative to compensation methods for fee-based advice. As discussed
above, the traditional insurance commission results in lower costs for the advice recipient over
the life of the contract than would a typical fee-based advice arrangement. Our language
permits these traditional compensation methods but ensures that the best interest of the
advice recipient is put first.

VII . . + + +
We ask the Department to permit the contract to require the exhaustion of arbitration or
mediation prior to pursuing a claim in court. This is consistent with ERISA benefit claims, and
serves to protect participants and IRA owners from the extensive costs, delays, and risks of
litigation by providing a fair opportunity for concerns to be resolved.

TM The disclosures in the proposed exemption would be extremely costly to participants and IRA
owners, requiring recoupment of millions of dollars in IT costs incurred to revise information
collection and present it in the very specific forms the Department proposed. Further, some of
the provisions appear to conflict with securities law and regulation. We ask the Department to
consider our suggestion for a set of disclosures that are modeled on existing securities and
ERISA disclosures, combining the information in a way that will ensure advice recipients receive
the information they need to make informed decisions.

x We ask the Department to remove the Section regarding the limited range of investment
products. While we appreciate that it could address issues presented by some proprietary
products, our recommended language elsewhere in this draft better addresses these concerns.
The limited range idea is conceptually troubling. It seems to suggest that product providers
must cover the waterfront of investment alternatives for their agents to sell products to
Retirement Investors, effectively precluding offering only specialized products, like annuities
and insurance contracts. In effect, the limited range concept serves to preclude certain
providers from participating in the market regardless of the quality of the products.

XI .
We ask that the Department adopt language clarifying that the type of fee and compensation

information to be disclosed regarding insurance and annuity contracts is consistent with the

Department's other disclosure regulations and exemptions. Our request is that the


FINRA Rule 2330, FINRA IM-2210-2 and SEC Form N-4, discussed below. There is nothing inherent in tax
advantaged accounts that would call for a different perspective. Furthermore, insurance guarantees are a
significant feature of variable annuities. Given the significance of this proposed change and the clear
disadvantage that it creates for variable annuity sales as compared to other retirement investment
products, we think the Department should continue to make PTE 84-24 available for all annuities.

e If the Department nevertheless concludes that the Best Interest Contract (BIC) exemption should become
the only exemption available for variable IRA annuity sales, we propose expanding the existing section for
annuities that is already in the BIC exemption to include annuity-specific provisions that account for the
value of insurance guarantees rather than focusing on just investment performance and fees, allows
consumers to properly compare like products on an apples-to-apples basis, and does not invite improper
comparisons with mutual funds and other non-guaranteed products."

Supplemental Comments Regarding Proposed Changes To PTE 84-24

We urge the Department to maintain PTE 84-24 as an available exemption for all annuities. As has been pointed
out in the many comment letters submitted by the industry on and before July 21, 2015, PTE 84-24 was developed
for insurance products. As such, it explicitly permits commissions and recognizes the value of product features like
insurance guarantees rather than focusing solely on investment advice services, as the BIC exemption does. The
disclosure requirements of PTE 84-24 already work for insurance products and many in the industry have already
adjusted to the requirements of this exemption. Having a separate exemption for all annuities illustrates that
annuities are different from other investments. It also advances the goal of treating similar products alike—
something the Department has publicly affirmed. Finally, it minimizes inappropriate comparisons of
fundamentally different products and services,’ while allowing consumers to easily compare all annuity products
under one set of rules.

Treating all annuity products the same, and within the same exemption, is preferable to bifurcating one class of
annuity and requiring it to comply with the BIC exemption. The Department’s stated basis for including variable
annuities in the BIC exemption—that variable annuities are securities— is misguided. Not all securities are the
same products, nor can they be regulated under identical rules. In fact, SEC and FINRA rules and regulations
contain unique requirements for annuities, including variable annuities, in recognition of their differences from
other securities and mutual funds. For example:

e SEC requirements for prospectus content are very specific for variable annuities (Form N-4), including
detailed descriptions of contract expenses in a standard format as well as the contract terms, and specific
rules for calculating standard performance of variable annuities.

e FINRA Rule 2330: Members’ Responsibilities Regarding Deferred Variable Annuities; with heightened
suitability requirements for recommended transactions, expanded principal review and approval
requirements as well as firm supervisory and training requirements. In particular, there must be an
“annuity-specific” reason why the client is choosing to purchase the annuity. Such reasons might include
the need for access to guaranteed lifetime income through the right to annuitize the contract and/or
downside risk protection to weather market downturns as an individual nears or is in retirement through
living benefit riders.

* We also propose several additional adjustments to the BIC exemption that would greatly simplify its overall requirements,
so that it could actually be usable.

* For example, it would be inappropriate to compare an insurance guarantee, and the fee charged for that feature, to
investment advice, and the fee charged for that service.

Page | 2


Appendix C — Statutory Employee Information

Background on Statutory Employees

Generally, workers are classified for tax purposes as either employees or independent contractors. A
statutory employee is an independent contractor who is treated as an employee for certain tax purposes.
The following provides an overview of the differences between employees and independent contractors
as well as the requirements to be a statutory employee.

Employee vs. Independent Contractor

Whether an individual is an employee or an independent contractor for tax purposes depends on the level
of direction and control retained by the service recipient. Specifically, in an employment relationship, the
employer directs and controls the work performed as well as the methods employed to perform required
tasks. In an independent contractor relationship, the worker is self-employed and controls the manner
and means by which contracted services, products or results are achieved.

The determination of whether a worker is an employee or an independent contractor has significant tax
consequences for both the worker and the service recipient as shown in the following table:

Federal Insurance Independent Contractor pays entire
Contributions Act (“FICA”) split the FICA tax. Each pay | SECA tax of 15.3% of wages up to the
Tax/ 7.65% of wages up to the Social Security Wage Base, 2.9%
Self-Employment Social Security Wage Base | thereafter. Receives income tax
Contributions Act (“SECA”) ($118,500 for 2015), 1.45% | deduction equal to half the tax paid.
Tax of wages thereafter.
Federal Income Tax Applies to all wages N/A
Withholding
Federal Unemployment Tax Employer pays 6% tax on N/A
first $7,000 of wages paid
Tax Qualified Health, Life Employees are eligible to Independent Contractors are NOT
Insurance, Pension, 401(k) participate eligible to participate unless they
and Cafeteria Plans qualify as “Full-Time Life Insurance
Salesmen” -a type of statutory
employee as described below

In the employment context, the additional tax and withholding obligations placed on a service recipient,
and the additional benefits provided to the worker, reflect that employers and employees generally have
an ongoing close relationship whereas service recipients and independent contractors typically work
together on a more transactional basis.

Statutory Employees in General

In 1950, the definition of the term “employee” for purposes of the Social Security Program and its related
FICA tax was expanded to include independent contractors in certain occupational categories who,
although they are not employees under the direction and control analysis described above, generally
maintain a closer relationship with their service recipients than other types of independent contractors."
Based on this distinction, these “statutory employees” must be treated as if they were employees for
purposes of the FICA tax. Thus, the statutory employee's service recipient is required to withhold FICA

* Tax Code Section 3121(d)



Appendix B

4 (separate accounts offering variable annuity contracts,
combined with a website as described in 29 CFR 2550.404a-5 (da) i

(B) For Assets that are annuities not subject te subparagraph (A+)
Shove, a disclosure document that meets the requirements of the
National Association of Insurance Commissioners (NAIC) Annuity
Disclosure Model Regulation, combined with a website as described
in 29 CFR 2550.404a-5(d); and

(C) For Assets not subject to subparagraph (A) or (B) above,
disclosures required by 29 CFR 2550.404a-5(d) with respect to the
investments actually selected or recommended by the Adviser.

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Appendix B

| (be) Recordkeeping. The Financial Institution maintains for a period of six
(6) years, in a manner that is accessible for examination, the records

| necessary to enable the persons described in paragraph (cd) of this
Section to determine whether the conditions of this exemption have been
met, 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 (d), below.

| (cd) (1) Except as provided in paragraph (dc) (2) of this Section, and
notwithstanding any provisions of ERISA section 504 (a) (2) and (b), the
| records referred to in paragraph (be) of this Section are
unconditionally available at their customary location for examination
during normal business hours by:

(A) Any authorized employee or representative of the Department or the
Internal Revenue Service;

(B) Any fiduciary of a Plan that engaged in a purchase, sale or
holding of an Asset described in this exemption, or any authorized
employee or representative of such fiduciary;

(C) Any contributing employer and any employee organization whose
members are covered by a Plan described in paragraph (c4) (1) (B),
or any authorized employee or representative of these entities; or

(D) Any participant or beneficiary of a Plan described in paragraph
(B), IRA owner, or the authorized representative of such
participant, beneficiary or owner; and

| (2) None of the persons described in paragraph (cd) (1) (B)-(D) of this
Section are authorized to examine 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.

Section VE--Insurance and Annuity Contract Exemption