IMOs: BICE for Insurance Intermediaries Arbitrary and Onerous

Dozens of industry voices over the weekend joined the chorus of objections to an exemption under which insurance marketing organizations (IMO) could sell fixed indexed annuities (FIA) as part of a far-reaching fiduciary rule.

The proposal for IMO exemption eligibility sets premium thresholds and fiduciary liability insurance too high, IMOs said in comments on the controversial rule.

Also, it unnecessarily burdens IMOs with financial disclosures, omits agent exclusivity contract clauses and even ignores life insurance sales from the exemption, other comments noted.

Under the IMO exemption, marketing organizations would have until August 2018 to comply fully with the requirements known as the Best Interest Contract Exemption for Insurance Intermediaries, part of the fiduciary rule.

The Department of Labor has proposed to delay by 60 days the April 10 start date of the fiduciary rule, which raises the standards of investment advice and products into retirement accounts. A further delay is possible, with the future of the entire regulation in some doubt.

A $1.5 billion premium threshold value and the fiduciary liability insurance requirement is too high, said Drinker Biddle & Reath attorneys Bruce L. Ashton and Bradford Campbell, who represent several IMOs with applications before the DOL.

“In formulating the $1.5 billion threshold value, the Department only cited to the premium threshold levels of four IMOs,” the attorneys wrote.

“We submit that using the Proposal to foster such business combinations is inappropriate and does not serve the interests of the consumers that the proposal is designed to assist,” the attorneys added.

The DOL received 33 comments in response to the IMO exemption.

Misplaced Criteria

Regulators set the IMO premium eligibility threshold at $1.5 billion per year, on average, for each of the previous three fiscal years. The move raised howls of protest that it would exclude hundreds of IMOs from qualifying as financial institutions, depriving them of billions of dollars of FIA sales every year.

Such a threshold, which many IMOs consider an arbitrary cutoff, would create a cartel and restrict choice, pricing and competition as the number of IMOs considered financial institutions narrows considerably, executives said.

But setting a high premium bar is critical for IMOs to have built up a solid track record in the market and to be large enough to have the technology systems and compliance frameworks in place to be worthy of qualifying for a class exemption, regulators countered.

Smaller IMOs could easily enter into partnerships and affiliations with larger IMOs and continue to offer FIAs to the marketplace, the regulators added.

In their comments, IMOs and other insurance brokers favored amending what the industry sees as misplaced eligibility criteria under which to sell FIAs.

“Fitness for eligibility under the Proposed Exemption should be judged on an intermediary’s satisfaction of the substantive requirements, not on a pre-judgement of stability and/or capacity that automatically cuts out 95 percent or more of market players,” said Paul R. Dougherty, president of the National Association of Insurance and Financial Advisors.

'Financial Institution' Status the Goal

Qualifying under the so-called class exemption would grant IMOs financial institution status and allow them and the independent agents they recruit to sell commission-based FIAs, a $60 billion market last year.

Obtaining financial institution status would put IMOs on identical regulatory footing as insurance companies, banks, broker-dealers and registered investment advisors (RIA).

Financial institutions accept the liability for terms of the Best Interest Contract Exemption under the fiduciary rule. A BICE is required for fixed indexed and variable annuities purchased with qualified retirement money.

Judges have sided with the DOL in court and supporters of the fiduciary rule say it will benefit investors to the tune of billions of dollars every year.

Parallel to the industry initiatives winding their way through the courts and the DOL’s proposed 60-day delay, President Donald J. Trump has ordered the Labor Department to review the rule to make sure it won’t add unreasonable costs or inhibit access to financial advice for retirees.

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

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