The Department of Labor issued a proposed rule Wednesday that would ease compliance with its fiduciary rule for some distributors of fixed annuity products such as indexed annuities.
The rule is a proposed class exemption that, if granted, would allow insurance intermediaries known as independent marketing organizations, as well as the insurance agents they contract with, to continue selling indexed annuities on commission in retirement accounts such as IRAs.
IMOs cater to independent insurance agents, through functions such as product marketing and distribution, training, and sales and compliance support. Independent agents are by far the largest distribution channel for indexed annuities, representing roughly 60% of product sales.
The DOL's fiduciary rule, though, as currently written, would be a disruptive force for IMOs and independent agents, as well as insurance companies, whose indexed annuity sales are forecast to drop precipitously because of the rule.
The fiduciary rule, which raises investment advice standards in retirement accounts, has a feature called the best-interest contract exemption, which allows brokers to receive commissions for sales of products such as indexed and variable annuities if certain compliance conditions are met.
The problem for IMOs is the DOL only allows “financial institutions” — defined as a bank, insurance company, broker-dealer or registered investment adviser — to use the BICE.
That put IMOs in a difficult position, because indexed annuities are traditionally sold with a commission, and insurance companies have largely been loath to step in on IMOs' behalf and take on what they view as additional risk.
The DOL's final rule, issued last April, allowed IMOs to submit individual applications for “financial institution” status. Thus far, 22 have applied.
The new proposed class exemption — the Proposed Best Interest Contract Exemption for Insurance Intermediaries, scheduled for publication in the Federal Register on Thursday — would grant this status to IMOs under certain conditions without them having to file individual applications.
Those conditions are largely similar to those of the BICE, but differ in a few ways.
“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,” according to the text of the exemption.
NOT AVAILABLE TO ALL
However, the DOL continues to say that, due to a wide variety of business models among applicants, “the proposal, while designed to provide class relief for insurance intermediaries, may not be available to all the applicants, depending on their individual circumstances."
An IMO, to qualify for the exemption, must satisfy a few conditions that differ from those of the other institutions such as broker-dealers using the BICE.
Perhaps the biggest hurdle is the requirement that the insurance intermediary has annual fixed annuity contract sales averaging at least $1.5 billion in premiums over each of the three prior fiscal years.
“That's a big number,” said David Rauch, chief operating officer and general counsel at Annexus, one of the 22 firms that had applied for an individual exemption. “You're talking about a handful of entities that could qualify under that.”
Annexus isn't an IMO, but what the DOL refers to as a “Super-IMO” or “IMO aggregator,” which acts as an intermediary between insurers and multiple small IMOs. It generated at least $4 billion in fixed annuity premiums last year, Mr. Rauch said.
According to the DOL proposal, “to the extent insurance intermediaries wish to pursue additional exemptive relief, the department will consider such additional requests.”
The exemption would be available on April 10, when implementation of the fiduciary rule begins. The DOL is proposing a “transition relief” period from April through August 15, 2018, during which time fewer conditions of the exemption would apply.
“We appreciate the department's recognition of the important role IMOs and insurance professionals play in providing retirement savings products to consumers across the country,” said Lee Covington, general counsel for the Insured Retirement Institute, a group representing annuity providers. “We will be reviewing the proposed exemption and providing comments to make sure it works in practice.”
Michael Hadley, partner at Davis & Harman, a lobbying firm for financial services organizations, said the 30-day time frame for submitting written comments and requests for a public hearing “is very short for an exemption of this complexity.”
“The short window is apparently necessary because unless there is some relief in place by April 10, there is a major gap in the final rule because of how the final rule treats annuities,” Mr. Hadley said. “This highlights how critical it is that the new administration seriously consider a delay in the regulation.”
Micah Hauptman, financial services counsel for the Consumer Federation of America, disagreed.
“No matter what the facts are, industry opponents always seem to call for delay. The fact of the matter is this proposed class exemption doesn't need to exist at all,” Mr. Hauptman said. “The DOL is doing IMOs a favor by allowing them to continue operating and receiving conflicted compensation for the sale of annuities, so long as the IMO satisfies the definition of financial institution and exercises some supervision over advisers who they contract with.”