Fiduciary Rule Divides Fixed And Variable Annuity Worlds

By Cyril Tuohy

It seems as if the U.S. Department of Labor (DOL) proposal to amend conflict of interest rules around individual retirement accounts (IRAs) has split the annuity world down the middle, with fixed annuities on one side and variable annuities on the other.

For the fixed annuity world life — so far — has appeared relatively “smooth,” as Labor Department regulators appear content with applying long-held exemptions to advisors engaged in transactions involving fixed products.

Comments submitted last week to the Labor Department by the National Association for Fixed Annuities (NAFA), the main trade organization for the fixed annuity world, were kept to 26 pages.

That was half the length of the comments filed by the Insured Retirement Institute (IRI), the main trade organization representing variable annuities.

Thus the enthusiasm of top NAFA officials who met with seven Labor Department regulators for 90 minutes to explain why advisors who sell fixed annuities should not be regulated in the same way as advisors in the next cubicle selling variable annuities.

“We felt like they understand what we had to say,” NAFA Executive Director Charles R. “Chip” Anderson, said in an interview with InsuranceNewsNet Wednesday, more than a week after the July 20 meeting with DOL. “They agreed with our points and were very gracious.”

“We felt good after the meeting,” Anderson added. “After the public hearings on Aug. 10, they will probably like to review some of the points with us again. We came away from the meeting feeling positive and we got our voice heard.”

“They were very willing to listen to our message, which I think is unique,” said Pam M. Heinrich, legal counsel to NAFA.

In the context of advice in the financial services world, the crux of the argument offered by NAFA is that the fixed annuity sale isn’t a fiduciary transaction at all, and therefore should be treated very differently from variable annuities and investments.

Fixed annuities - distributed through banks, wirehouses, broker/dealers, captive or independent sales channels and subject to state regulatory approval - are not an investment but simply a contract sold by career or captive agents, independent agents or employees of distribution companies.

Guaranteed income riders, which secure an income stream for the life of the annuitant, may well have bolstered the case for fixed annuities in the eyes of the DOL, as the riders fulfill the need for guaranteed income under the annuity contract.

“One of the messages we brought to the meeting was that these products go a long way to satisfy the retirement crisis which the DOL rule intends to address,” Heinrich said.

Barring a few quibbles around the DOL’s proposed exemptions, carve outs and commissions, NAFA seems to be on sound footing — so far — in arguing that deals involving fixed annuities don’t fall under federal fiduciary oversight clauses.

DOL seems more than happy to continue discussion around whether relief provisions for IRA transactions involving insurance and annuity contracts not considered securities “strikes the appropriate balance and is protective of the interests of the IRAs.”

Contrast NAFA’s relatively smooth voyage through the DOL’s proposed regulatory shoals with the squalls buffeting the IRI, its veteran skipper, president and CEO Catherine J. Weatherford and first mate Lee Covington, IRI’s senior vice president and general counsel.

Weatherford and her team of legislative experts opened the summer months with the IRI’s legal and regulatory conference at the end of June, where lobbyists conveyed their concerns with the breadth of the proposed rule and its effect on variable annuities.

As far as variable annuities are concerned, the DOL proposal is “a big deal,” Covington said at the time. Just how big a deal has become clear with the thousands of comments that poured into the DOL at the close of the comment period last week.

IRI plunged into details of the proposal to resurface three weeks later with a 52-page response to the DOL’s proposed definition of the term “fiduciary,” the department’s Proposed Transaction Exemption 84-24 and the Best Interest Contract Exemption.

Unlike fixed annuities, variable annuities are the regulated as securities and investment products.

Seeking to further regulate fiduciary transactions, the DOL has proposed to revoke relief mechanisms for commissions paid to insurance agents, brokers and pension consultants in connection with the purchase by IRAs of variable annuity contracts.

Instead, agents and brokers entering into a variable annuity contract transaction would need to meet the requirements of the so-called Best Interest Contract Exemption. The IRI, dozens of other trade groups and thousands of agents, advisors and brokers say these requirements are too onerous.

For agents and intermediaries in the investment world selling variable annuity products regulated as securities, the DOL proposal presents a deeper challenge than it does for agents in the fixed contract transaction universe.

By lumping variable annuities in with investment securities, the DOL appears to have given the variable annuity industry less wiggle room. Variable annuity industry proponents now find themselves in a position of pushing back against the DOL, particularly with regard to Prohibited Transaction Exemption 84-24.

“Given the need for a level playing field for all annuities, exemptive relief should be available for sales of both variable annuities and fixed annuities to IRAs under the Proposed Amendment to PTE 84-24 and the Proposed BIC Exemption,” Weatherford wrote in her July 21 comment letter to the DOL.

By contrast, the fixed annuity industry still has more latitude to shape the DOL’s outlook before the department publishes a final rule, which most likely will come early next year. With a few refinements, NAFA is content that the PTE 84-24 is the “appropriate regulatory exemption for fixed annuities.”

The real back and forth has just begun and a series of hearings scheduled for next month will serve as a critical next step for variable annuity industry proponents to make their case about why variable annuity sellers deserve relief.

In an interview last week, Covington said IRI met with DOL earlier “and by all accounts (Labor Secretary Thomas) Perez and his staff want to hear comments and get the rule right and so we’ll take them at their word.”

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].