In a 24-page document that covered 34 questions released last Thursday, the Department of Labor released answers to some of the most frequently asked questions they're getting about the rule.
We’ve been asked to give you Americans for Annuity Protection’s (AAP) four quick takeaways for independent annuity distribution and life-only insurance advisors.
As our readers know, AAP has been at the forefront of discussions with DOL staff and submitting questions seeking clarification. From the specific language and terms used in the FAQ, it is clear they paid attention.
We are sure other worthy groups and firms were equally involved and it shows. Once again, we learn what a united industry can do if we focus on a more workable regulation that creates better consumer outcomes.
The bulk of the questions covered level-fee fiduciaries, nuances of the Best Interest Contract Exemption (BICE) and disclosures. However, four very relevant questions were addressed specifically for annuities and annuity distribution channels.
We have paraphrased the questions as AAP received them and submitted to the DOL for clarification. Below are the AAP questions, how DOL framed them, and their answers (in italics). Any emphasis you see below has been added by AAP to highlight and point you to the relevant information.
AAP’s FAQ: Can insurance companies or an assigned financial institution (FI) supervise their own appointed agents and their activities related to their own products without concern for activities related to advisor’s other carriers or FIs?
DOL’s Q22: Can insurance companies rely on independent insurance agents to sell fixed rate and fixed indexed annuities to retirement investors after the applicability date of the Rule?
Yes. The Department’s exemptions for annuity sales (PTE 84-24 and the BIC Exemption) 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.
While the independent agent may recommend products issued by a variety of insurers, the full BIC Exemption does not require insurance companies to exercise supervisory responsibility with respect to the practices of unrelated and unaffiliated insurance companies. 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.
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 when recommending the insurer’s products; avoid improper incentives to preferentially push the products, riders, and annuity features that are most lucrative for the insurer at the customer’s expense; ensure that the agent receives no more than reasonable compensation for its services in connection with the transaction; and adhere to the disclosure and other conditions set forth in the exemptions.
In other words, its responsibility is to oversee the recommendation and sale of its products, not recommendations and transactions involving other insurers.
It appears that carriers DO NOT have to warrant the impartial conduct of independent agents regarding their activities with and sales of other carriers; only the recommendation activity with their own products. This is a significant development for independent annuity advisors and insurance marketing organizations.
AAP’s FAQ: Can I work with my choice of IMO and not be restricted to any one financial institution?
DOL’s Q23: What is the role of insurance intermediaries, such as independent marketing organizations (IMOs), in the sale of annuity contracts to retirement investors after the applicability date of the Rule?
Under the exemption, marketing organizations like IMOs are not treated as financial institutions that can execute the Best Interest Contract. Instead, the exemption contemplates that the insurance company (or other enumerated financial institution) will take responsibility for ensuring that the exemption’s conditions are met and that investment advice to buy the insurer’s products are in the best interest of retirement investors.
This does not mean, however, that insurance companies and independent agents are prohibited from working with IMOs, assuming that the IMOs do not promote imprudent or disloyal advice or advice that otherwise violates the basic standards of fair dealing set forth in the BIC Exemption.
The prevailing recruiting tactic today is that you must be with one marketing organization or FI to continue to sell annuities and you may only sell the products offered by that marketing organization or FI. This appears to be a play out of the BD handbook of single BD relationship and only sell what’s on that BD’s shelf.
However, the Rule does not require that you only be with one IMO or FI. An IMO or FI may require it to aggregate all of your business, but the Rule does not. By recognizing that advisors can and do have multiple carrier relationships (which by extension means possibly more than one FI or IMO), the advisor seeking as many carriers, IMOs and FIs that offer the products his clientele demands, may remain independent.
AAP’s FAQ: Does everything need to be in place and working on April 10th 2017?
DOL’s Q1: When do firms and their advisers have to comply with the conditions of the new BIC Exemption and Principal Transactions Exemption?
The Rule’s amended definition of fiduciary advice will first apply on April 10, 2017. On that same date, the BIC Exemption and Principal Transactions Exemption will become available to fiduciary advisers. At the outset, however, and for a transition period extending until January 1, 2018, fewer conditions will apply to financial institutions and advisers that seek to rely upon the exemptions.
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.
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AAP’s FAQ: The 65 Million Dollar Question!
DOL’s Q21: Can “insurance-only” agents continue to sell fixed rate and fixed indexed annuities to retirement investors after the applicability date of the Rule?
Yes. Both the BIC Exemption and PTE 84-24 provide relief for agents, including insurance-only agents, who sell fixed rate and fixed indexed annuities to retirement investors, as described below. Under PTE 84-24, an insurance agent can receive an insurance commission on the sale of a recommended “fixed rate annuity contract.
This is conclusive and unambiguous that you do not have to be a 65-licensed investment advisor to rollover qualified money into an IRA annuity. However, as always, you must stay clear of "unpermitted activities” where you stray from general investment information and insurance advice into specific advice about the investments your client holds.
There are still more FAQs for the FAQ, but for now, these answers are good news for independent distribution and annuity customers.
Kim O’Brien is the vice chairman and CEO of Americans for Annuity Protection. She has 35 years of experience in the insurance industry. O’Brien served The National Association for Fixed Annuities (NAFA) for almost 12 years and led the organization to defeat the SEC’s Rule 151A.
Contact Kim at [email protected]
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