DOL Clarifications: No News Here, Move On Folks

By Kim O'Brien InsuranceNewsNet

Commentary

It’s like looking at a birthday gift from an ex-anything! All sorts of emotions are coursing through your body - anxiety, trepidation, excitement, hope, and fear! You take a deep breath and you unwrap it – and you … sigh.

That’s how it felt when we received the first tweet from the Department of Labor and read the news headlines shouting about the DOL’s Fiduciary Rule technical corrections and clarifications for insurance companies.

As far as clarifications go it didn’t go very far. We’ve been talking and working with many annuity insurance companies and they are all struggling with the layers of complexity the existing rule has on life-only agents and IMOs, not to mention, but we will, registered reps and investment advisors.

Even if the industry is successful in defeating the rule, AAP believes we will be dealing with a best interest standard (and its compliance complexities) for all annuity advice in some form, from some agency, for some time.

The many questions everyone in the annuity industry, and particularly the variable and indexed annuity industry, are dealing with are complicated and legal; with the answers uncertain. Just to name a few:

• What qualifies a recommendation as a best interest recommendation?
• What constitutes reasonable compensation?
• How do the different licensees, with different product availability, ensure they’ve selected the “best” product?

So when we received word that the DOL had issued technical corrections to their Best Interest Contract Exemption, which was published in the Federal Register on April 8, 2016, we were as giddy as a birthday girl at her first big party!

According to the DOL:

“The Best Interest Contract Exemption allows certain persons that are fiduciaries under the Employee Retirement Income Security Act of 1974 (ERISA) or the Internal Revenue Code (the Code), or both, by reason of providing investment advice, to receive compensation that may otherwise be prohibited.

The corrections in this document fix typographical errors, make minor clarifications to provisions that might otherwise be confusing, and confirm insurers’ broad eligibility to rely on the exemption, consistent with the exemption’s clearly intended scope and the analysis and data relied upon in the department’s final regulatory impact analysis (RIA).” (emphasis added)

Terrific, that suggested we would really see some guidance that will help steer business decisions about how to deal with this very compliance-challenging rule.
NOT!

They offered 8 “corrections.”

1. Clarified that the negative consent timelines matched both sections of the exemption in which it was referenced. Whew!
2. “Applicable Date” changed to actual date of Jan., 1, 2018.
3. Added a comma to a list of items.
4. Added “sale” to make sure that with regard to insurance and annuity contracts, they meant not just the “purchase” but the “sale” as well. That clears it all up!
5. Matched a previously unmatched parenthesis (don’t you hate unmatched parentheticals?)
8. Clarified that when they said “Act” they meant “ERISA.”

So that leaves 6 and 7.

Admittedly, clarification 6 is a bit more confusing and difficult to unwind (as we are finding with much of the rule). The department states that the definition of “advisor” is an individual who: (1) Is a fiduciary of the Plan or IRA solely by reason of the provision of investment advice.

In contrast, language in the exemption provided for an exclusion if an advisor “has or exercises any discretionary authority or discretionary control with respect to the recommended transaction.”

The department says they did not intend to prevent advisors from using the exemption if they have discretionary authority and, therefore, deleted the word “solely” to clarify their intent.

Clarification 7 is the beef of the technical correction for insurance companies. When drafting the rule, the department stated that insurance companies who rely on the exemption must be domiciled in a state “whose law requires that actuarial review of reserves be conducted annually by an Independent firm of actuaries and reported to the appropriate regulatory authority.”

Unfortunately, this “independent firm of actuaries” conflicted with actual practice and the National Association of Insurance Commissioners (NAIC) Actuarial Opinion.

The department acknowledged that the condition “inadvertently limited the availability of the exemption with respect to insurance companies because, while state laws generally require annual actuarial reviews of insurance company reserves to be conducted by a qualified actuary appointed by the board of directors.”

Since, the existing state requirements do not require an “independent firm of actuaries,” that phrase was deleted. Some people may take exception to our tongue-in-cheek reporting of this news. Unfortunately, since we were hoping for so much more clarification and guidance, the actual gift was not really a gift at all.

As we work to make sure the marketplace is ready for this rule (and support litigation and legislative efforts to defeat it), we must seek to ensure that consumers aren’t pushed to more confusing disclosures and processes simply to save for retirement. The point is, this unwieldly rule is so complicated and bifurcated that there will be countless more clarifications, corrections, guidance memos, etc.

Each new “clarification” will merely turn an already uncertain annuity marketplace into more turmoil and chaos and consumers will be at a loss as to what it all means and where they can turn to for help.

The two more substantive distinctions are no doubt very important to all insurance companies struggling to comply with the rule. However, this clarification was like finding the gift box contained a very lively frog and not the prince we’d hoped for.

As we wait for more of these “technical corrections” to dribble out from the department while firms are wrestling with setting up systems and procedures for compliance, it will push out the date by which they can inform their customers and help them adapt to the changes they will experience.

That’s too bad for consumers, especially those in existing annuities who will be inundated with information and lines of legal text informing them of the change or asking them to “negatively consent” on a form they received in the mail.

This first volley demonstrates the importance of reading any rule BEFORE it is issued, so consumers aren’t left having to kiss the frog in the hope that it will turn into a prince!

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].