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IMOs Await Word on Reserving Conditions Under DOL Exemption

The Office of Management and Budget has until late March to review the Department of Labor’s exemption allowing insurance intermediaries, such as independent marketing organizations, to sell fixed indexed annuities with retirement funds under the conflict of interest rule. 

Any changes requested by OMB’s Office of Information and Regulatory Affairs to the DOL’s document must be made within the 90-day period, an OMB official said. The OMB review is the last step before the DOL receives the green light to publish the blueprint of the framework in the Federal Register.

The rule was expected to require IMOs to meet certain conditions in order to qualify as a financial institution. Issuing a class exemption would raise the profile of IMOs to one of a financial institution on a par with regulated financial product distributors such as banks, broker/dealers, registered investment advisors and insurers for the purposes of the sale of financial products and advice into and for retirement accounts.

The status is critical for IMOs because a financial institution is required to guarantee that the terms of the best interest contract exemption (BICE) are upheld. The exemption is required for fixed indexed and variable annuities purchased with qualified retirement money.

“In the end, the idea is to have an IMO or FMO that does the same thing as the companies — banks, broker/dealers, registered investment advisors and insurers — in the other four classes,” said David Rauch, general counsel and chief operating officer of Annexus, an annuity product development company in Scottsdale, Ariz.

Annexus and 19 other marketing organizations have individual financial institution applications pending before the DOL.

As a fifth category, IMOs simply would need to give notice that they intend to apply under the BICE, and then move ahead. It would be up to the DOL to audit the IMO if regulators want to confirm standards that may be necessary to qualify under the terms of the fifth category, Rauch said.

Whether to grant financial institution status individually to IMOs or as an entire class had been on the regulators’ radar for months after the DOL announced in April 2016 that fixed indexed annuities, on which agents collect a commission, would have to be sold under the fiduciary rule’s BICE.

The bulk of fixed indexed annuities are sold through independent agents and IMOs. When IMOs weren’t included as financial institutions, some wondered aloud whether selling fixed indexed annuities under the DOL’s new fiduciary rule was still viable.

IMOs recruit independent insurance agents to sell fixed indexed annuities, a $60 billion segment of the fixed annuity market. In exchange for recruiting agents, IMOs provide sales, marketing and compliance help to agents.


Reserving Requirements

Investors look to FIAs to guarantee their investment principal while generating higher returns than they would receive in other products during an era when interest rates and the income generated by those savings remain at record lows.

As a result, FIAs represent one of the best-selling annuity products in the market. But before setting the parameters for IMOs as an entire class, regulators are grappling with how IMOs meet capitalization and reserving requirements, Rauch said.

Setting the proper levels of capitalization requirements is considered a vital point for regulators that need to allow IMOs and the thousands of agents to continue to operate profitably in the market yet ensure that safeguards remain.

Capitalization and reserving set too high could hamper an IMO’s ability to conduct business. But if the capitalization levels are set too low, IMOs representing agents may not have enough to pay a legal judgment levied against them, said the chief executive of a marketing organization that applied for financial institution status.

“If a financial institution is going to stand behind the recommendation of their advisors, they need to be capitalized well enough to withstand changing market conditions and be able to ensure longevity and stability for the customers they serve,” Mike Kalen, CEO of Futurity First Financial, told InsuranceNewsNet

in October.

Kalen said he was generally in favor of setting capital and financial strength requirements for IMOs, so long as the requirements are not too onerous. Futurity First Financial owns three IMOs.

Federally regulated banks and state-regulated insurance companies are routinely audited to make sure claims reserves are set at appropriate amounts. But IMOs, which aren’t similarly regulated, haven’t had to face the same capital requirements.

So who is responsible for making sure IMOs are adequately capitalized? For the moment, that’s not quite clear.

“I don’t see how the DOL could transfer this to state regulators — whether an IMO is qualified to, and acting as a financial institution, seems to be a DOL-only issue, to be overseen and regulated by DOL,” Rauch said.

Many IMOs have listed per-occurrence errors and omissions, or E&O, limits of $5 million and aggregate E&O limits of $10 million, IMO application materials indicate. However, this isn’t nearly the same as setting capitalization requirements, which affects the balance sheet of a company.

Regulators are expected to release the capitalization and reserving framework shortly. They are said to have all the information they need to develop a short list of bullet points — not pages and pages of fine print — for requirements necessary for the fifth and final class of “financial institution.”

The 20 IMOs with applications before the DOL are Advisors Excel, Topeka, Kan.; Alpine Brokerage Services, Marlton, N.J.; AmeriLife Group, Clearwater, Fla.; Annexus, Scottsdale, Ariz.; Brokers International, Panora, Iowa; Clarity 2 Prosperity, Westlake, Ohio; ECA Marketing, Eden Prairie, Minn.; Futurity First Financial Corp., Hartford, Conn.; Financial Independence Group, Cornelius, N.C.; Gradient Insurance Brokerage, Topeka, Kan.; Ideal Producers Group, Overland Park, Kan.; InForce Solutions, Woodstock, Ga.; Insurance Advocates; Kapolei, Hawaii; InsurMark, Houston, Texas; Legacy Marketing Group, Petaluma, Calif.; M&O Financial, Southfield, Mich.; Saybrus Partners, Hartford, Conn.; The Annuity Source, Bellevue, Wash.; Kestler Financial Group, Leesburg, Va., and First Income Advisors, Eden Prairie, Minn.


InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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