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DOL Rule Coming Into Focus

In the first promised guidance, the DOL released 34 FAQs in late October. The questions came straight from the industry, officials said, touting the effort as proof the DOL will work with financial services to make the new rules a success.

“Gathering these questions from multiple sources and making the answers public is another example of our sincere efforts to work with the financial services industry to craft a rule that makes sense and works in the real world of investment advice,” said Phyllis Borzi, assistant secretary of Labor for DOL’s Employee Benefits Security Administration.

One rumor the DOL dispelled is that it will delay implementation of the rule.

“DOL reiterated its prior finding that an applicability date of April 10, 2017, provides adequate time … apparently signaling a disinclination at this time to extend the applicability date,” Sutherland, Asbill & Brennan stated in its analysis of the FAQs.

After that date, all commission-compensated products must be sold in accordance with the new rules. That means fixed annuities will require Prohibited Transaction Exemption 84-24, while fixed indexed and variable annuities will need the Best Interest Contract Exemption.

However, the guidance clarified that although agents and advisors must use the exemptions beginning on the initial date, the DOL will not be in fierce compliance mode as long as good-faith efforts are being made.

“The transition period gives these fiduciaries additional time to prepare for full compliance with all of the conditions of the exemptions, while providing basic safeguards to protect the interests of retirement investors,” the DOL guidance stated.

More Key Points

The bulk of the DOL guidance covered level-fee fiduciaries, nuances of the BICE and disclosures, said Kim O’Brien, vice chairman and CEO of Americans for Annuity Protection. However, analysts found a few important points clarified by the FAQs.

On these points, the DOL provided largely positive news for independent agents who sell annuities, O’Brien said. Here are three selected questions:

  1. Can insurance companies rely on independent insurance agents to sell fixed rate and fixed indexed annuities to retirement investors?
    The answer here is yes. The department’s exemptions for annuity sales (PTE 84-24 and the BICE) do not require insurance companies to use any particular distribution channel. 

    While insurance companies may rely on a captive sales force to distribute their proprietary products, they may also distribute annuities through independent insurance agents or other channels.

    In this arrangement, the insurance company would act as the financial institution with regard to the sales of its proprietary products, but would not serve in that oversight role for products sold for other insurers.

    Under the exemption, the insurer must adopt and implement prudent supervisory and review mechanisms to safeguard the agent’s compliance with the impartial conduct standards.

    “If an insurer chooses to act as the supervisory financial institution for purposes of the exemption, its obligation is simply to ensure that the insurer, its affiliates, and related parties meet the exemption’s terms with respect to the insurer’s annuity which is the subject of the transaction,” the DOL stated.

    In other words, independent agents may continue to offer a variety of products from a variety of insurers, with each insurer serving in the oversight role with regard to its products.

    This is “a significant development for independent annuity advisors and insurance marketing organizations,” O’Brien said.
     
  2. What is the role of insurance intermediaries, such as independent marketing organizations (IMOs), in the sale of annuity contracts?

    Under the exemption, marketing organizations like IMOs are not treated as financial institutions that can execute the BICE, although they can apply (and many have) to be granted financial institution status.

    Instead, the exemption expects that the insurance company (or another financial institution) will take responsibility for ensuring that the exemption’s conditions are met and that best interest recommendations are made.

    Sutherland pointed out two statements DOL makes in its guidance about the role of IMOs:
    • DOL noted that it would be permissible for an insurance company selling through independent agents to bolster its compliance by contracting with an IMO to ensure that agents working through that IMO satisfied the impartial conduct standards.
    • IMOs can continue to receive commissions and override payments under either BICE or PTE 84-24 if the conditions of the applicable exemption are met.

The prevailing recruiting tactic today is that you must be with one marketing organization or financial institution to continue to sell annuities and you may only sell its products, O’Brien said.

“By recognizing that advisors can and do have multiple carrier relationships, the advisor seeking as many carriers, IMOs and FIs that offer the products his clientele demands, may remain independent,” she added.

  1. How are “front-end” and “back-end” bonuses treated under the rule?

    With regard to advisor recruitment programs, the DOL clarified that front-end bonuses or awards tied to ongoing service by the advisor are “consistent with the warranties under the full BICE.”

    However, back-end bonuses or awards tied to the achievement of sales or asset targets on an “all or nothing” basis are not

    “This is a more absolute statement on this point than anything in the preambles to the BICE,” Sutherland noted in its analysis.

    DOL will allow relief under the full BIC Efor binding commitments to pay “back- end” awards entered into prior to the October 27 date of the FAQ if the firm “determines in good faith that it is contractually obligated to continue those awards, and adopts special and stringent procedures to oversee conflicts created by those awards.”

     

Lawsuits Ongoing 

Opponents sought clarity through the federal court system with multiple lawsuits filed this summer. But those court cases — in Minnesota, Kansas, Texas and Washington, D.C., federal courts — are moving at a snail’s pace.

As of press deadline, National Association for Fixed Annuities vs. Department of Labor was the only case nearing any resolution. Thrivent Financial vs. DOL is not even scheduled for a hearing until March 3 in St. Paul, Minn.

Lawsuits in Kansas and Texas are in between and awaiting a resolution. Even when rulings are eventually issued, appeals seem very likely.

Meanwhile, the industry players cannot wait. Most are scrambling to put procedures and technology in place to comply with the rule by April.

The DOL has promised that additional guidance is forthcoming.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com.