Fate of FIAs Rests With DOL Rule Retooling

Could this week’s Department of Labor’s request for information on the fiduciary rule signal an opening for the return of fixed indexed annuity (FIA) sales under a less stringent exemption?

The possibility gives policy analysts like Judi Carsrud, government affairs director for the National Association of Insurance and Financial Advisors, hope that advisors will get another shot at making life easier for themselves in the years to come.

Nothing would please Carsrud and other annuity advocates more than if DOL regulators shifted FIAs out from the burdensome Best Interest Contract Exemption, or BICE, and back into the less-stringent Prohibited Transaction Exemption 84-24, or PTE 84-24.

Such a turn of events isn’t out of the question.

DOL regulators signaled Thursday that they are keen explore the advantages and drawbacks of expanding the types of annuities covered under PTE 84-24 as part of a broader review of the fiduciary rule’s exemptions.

“Would it facilitate advice to expand the scope of PTE 84-24 to cover all types of annuities after the end of the transition period on January 1, 2018?” regulators asked.

The answer from the annuity community is an unequivocal yes.

Regulators also indicated an interest in looking at the implications of expanding the definition of what constitutes a financial institution beyond banks, broker-dealers, insurers and registered investment advisors (RIA).

Expanding the definition of a financial institution to include more independent marketing organizations (IMO), which sell the lion’s share of the $60 billion worth of FIAs sold every year, is a key element in the FIA calculus.

Redefining Financial Institutions

The past 15 months have been a long, strange trip for FIAs. Beginning in April 2016, indexed annuities were separated from their fixed annuity cousins and placed, along with variable annuities, under the more rigorous BICE.

Regulators decided the higher sales threshold applied to FIAs because indexed annuities were opaque. FIAs didn’t meet the standard required of the fiduciary rule designed to limit conflict of interests among financial advisors, the DOL said.

When industry groups pointed out that the fiduciary rule seemed to ignore the status of IMOs, effectively putting a huge question mark on a fast-growing $60 billion slice of the fixed annuity market, regulators went back to the drawing board.

But the DOL solution was to set the bar for IMOs to qualify as a financial institution so high that only about a dozen IMOs could even contemplate it.

Either regulators need to move all FIAs back to the 84-24 exemption, or regulators must develop a workable exemption so that the bulk of the 300 to 400 IMOs operating in the U.S. can continue selling FIAs, Carsrud explained.

“Or they can redefine what is a financial institution,” she added.

Yearning for Simplicity

The tortured treatment of FIAs by lawyers and federal bureaucrats was done with little input from advisors who have to live with the rule out in the real world of clients and retirees.

The solution would have been to leave all fixed annuities under 84-24 and leave the impartial conduct standards of the fiduciary rule intact while writing a simple exemption for products that don’t fall under PTE 84-24, Carsrud said.

Requests for information like the one published by the DOL in the Federal Register on Thursday aren’t necessarily an indication of where or how the DOL is leaning, she said.

Rather, it is part of collecting information to comply with President Donald J. Trump’s order to review the impact of the fiduciary rule on the marketplace.

“We’re still looking forward to working with the new (DOL) team and rolling up our sleeves,” Carsrud.

And who knows, she may yet get her wish of seeing FIAs moved back under PTE 84-24, which is where she and many others believe FIAs belonged in the first place.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at cyril.tuohy@innfeedback.com.

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