IMOs Call DOL Fiduciary Exclusion Unworkable

Regulatory thresholds proposed for independent marketing organizations (IMOs) to participate in the sale of fixed indexed annuities are so high as to be virtually worthless and unworkable for the bulk of the IMO industry, industry experts said.

Department of Labor regulators on Wednesday proposed that IMOs must have generated an average of $1.5 billion in annual fixed annuity premium over each of the three previous fiscal years as one of the threshold requirements to be issued a “financial institution” exemption under the DOL's fiduciary rule.

“That is crazy,” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of the indexed life and annuity industry tracker Wink’s Sales & Market Report.

She said that few IMOs nationwide would meet that threshold. “That puts another 338 IMOs in the dust,” she said.

“As this is drafted, nobody is going to use this exemption,” another industry expert said. “Unplayable.”

DOL regulators appear to have approached the IMO industry through a very different lens, however. They and wanted to make sure IMOs using the financial institution exemption were well-established distributors with a track record, financial stability and “operational capacity” to implement anti-conflict of interest policies and procedures.

“The proposed $1.5 billion threshold was based on the representation in the applications,” the DOL said in its 220-page proposal. “Not all applicants provided this information, but the applicants that did generally indicated sales of this amount or more.”

DOL regulators also have proposed a transition period for IMOs that qualify as financial institutions from the applicability date of the exemption to Aug. 15, 2018.

The Exclusive Club

Industry analysts had feared that regulators might set the bar so high as to create an “exclusive club” of IMOs that could even contemplate applying for the exemption.

“Many of the applicants that we represent were dismayed so see that requirement because it would be an exclusive club,” said Bruce Ashton, an attorney with Drinker Biddle, which represents many IMOs in front of the DOL.

Only a handful – five to seven – IMOs are large enough to meet the $1.5 billion premium requirement, he said.

A financial institution exemption would put IMOs on a par with regulated financial products distributors such as banks, insurance companies, broker/dealers and registered investment advisors.

Financial institution status is critical for IMOs because a financial institution is required to guarantee that the terms of the best interest contract exemption (BICE) are upheld. The exemption is required for fixed indexed and variable annuities purchased with qualified retirement money.

IMOs sell about $35 billion worth of fixed indexed annuities every year, or about half of the $60 billion worth of fixed indexed annuities expected to be sold in the U.S. in 2016. Granting IMOs favored financial institution status is considered key to distributing these annuities.

The DOL has asked for comments on its proposal. The industry has 30 days to respond and expects to make its voice heard loud and clear. The agency, at its discretion, could extend the comment period to 60 days or even longer.

“This is the classic case of too little too late,” Chip Anderson, executive director of the National Association for Fixed Annuities, said in a news release issued Thursday morning.

“It’s too little because it comes attached with strings and conditions that still make the rule unworkable for most of the fixed annuity industry,” he said. It’s too late because the industry doesn’t have enough time “to reshape itself” to meet the requirements, he added.

NAFA is suing the DOL to have the fiduciary rule abolished.

Was DOL Leading on the IMOs?

Twenty-two IMOs have applied for a financial institution exemption. However, setting the premium threshold at $1.5 billion means that only a handful of the 22 applicant IMOs will be able to qualify, and that’s even before meeting other requirements which include auditing and disclosure rules.

For months, IMOs had been waiting for regulators to issue guidance on an IMO exemption, but IMO leaders appeared at best disappointed with the DOL’s result.

“We expected some kind of size requirement but we’re frankly surprised they set it so high,” said Mike Kalen, CEO of Futurity First Financial, which owns three IMOs.

“My first reaction is that this clarification is better late than never, and to some degree validates that IMOs are an important part of retirement solutions that were originally left out,” Kalen added. “It validates what our industry has been saying all along with regard to retirement plans.”

Others, however, were left with a sense of betrayal.

“It just seems disingenuous to me that this entire time, the DOL has put on the appearance that they are wanting to work with IMOs, to allow them to continue transacting business,” Moore said. “This threshold doesn’t appear to reiterate that mentality.”

Regulators maintain that IMOs that don’t qualify or choose not to use the financial institution exemption can still participate in the distribution of fixed indexed annuities.

Many smaller IMOs could continue selling fixed indexed annuities through affiliates such as registered investment advisors, broker/dealers and even larger IMOs that act as financial institutions and satisfy the requirements of the Best Interest Contract Exemption of the fiduciary rule, according to the DOL’s proposal.

But Jason Smith, CEO of Clarity2Prosperity, a smaller IMO outside Cleveland, said IMOs could be pushed into a selling spree as they race to boost average premium threshold levels. "I also see that $1.5 billion level creating uninvited consequences," he said.

Ashton, the attorney with Drinker Biddle, said some of the DOL’s proposed financial institution exemptions, particularly those around agent exclusivity contracts and IMO supervisory arrangements, were less stringent than he expected.

“My reaction is there’s good news and bad news,” he told InsuranceNewsNet.

The good news is that the industry, after months of waiting, finally knows what the DOL is thinking. But the bad news is that. in addition to the high premium threshold for an industry operating on relatively slim margins, specialized professional liability policies for IMOs don’t exist, at least for now.

Any way you cut it, a $1.5 billion average premium threshold is a big number, he said.

“Most of the entities that applied, and those that didn't apply, wouldn't be able to meet that requirement as they don't have that level of sales. So essentially what the proposed exemption would do is create a very exclusive club and I don't know that that was the intention of the DOL,” Ashton said.

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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