IMO Exemption Rule Out Next Week, OMB Says

By Cyril Tuohy

The Office of Management and Budget hopes to publish a crucial exemption that would permit independent marketing organizations to sell under the new fiduciary rule by the end of next week.

OMB wants the exemption enabling IMOs to serve as financial institutions published by the inauguration of President-elect Donald J. Trump, said an attorney close to the proceedings.

“My reading of the tea leaves is that the DOL will move heaven and earth to get it out of OMB and get it published by Jan. 20, but then what happens to it who knows,” said Bruce Ashton, a lawyer with the firm Drinker Biddle & Reath, which represents many IMOs before the DOL.

Rep. Joe Wilson, R-S.C., introduced a bill Friday that would delay the DOL’s fiduciary rule effective date by two years. The rule is one of the most costly and burdensome mandates to come out of the Obama administration, Wilson said.

Once reported out of OMB, the exemption will be published in the Federal Register, a DOL spokesman said, at which time the comment period clock starts ticking.

The normal comment process typically lasts 60 days, so the IMO exemptions would not be effective until the middle of March at the earliest. The DOL could decide to shorten the period to 30 days, Ashton said.

The fiduciary rule is slated to begin taking effect April 10.

Labor Department regulators will decide how long the comment period lasts, but the patience of IMOs with the agency’s procedural pace is beginning to wear thin as agents feel they could lose sales to banks, broker-dealers and investment advisors.

“We need clarity and the time to finish the build so agents have the opportunity to compete on a level playing field,” said Mike Kalen, CEO of Futurity First Financial Corp., which owns three IMOs.

As of the third quarter 2016, IMOs contributed 51.68 percent of the $14.3 billion in indexed annuity sales, said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of the Wink’s Sales & Market Report.

Class exemption

The DOL fiduciary rule is expected to require IMOs to meet certain conditions to qualify as a financial institution.

Twenty IMOs have applied financial institution status and DOL regulators are leaning toward issuing a class exemption for IMOs to be able to sell financial products and advice into retirement accounts.

Issuing a class exemption would raise the profile of IMOs to one of a financial institution on a par with regulated financial product distributors like banks, broker-dealers, registered investment advisors and insurers.

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 are responsible for the bulk of fixed indexed annuity sales and the average indexed annuity premium in the U.S. was $114,711 in the third quarter, according to Wink.

Industry analysts expect fixed indexed annuity sales to reach a record $60 billion via all sales channels, and a little more than 50 percent of that $60 billion is sold into qualified accounts, according to David Rauch, chief operating officer of Annexus, an annuity product developer in Scottsdale, Ariz.

Business Volumes a Factor in Requirements

IMO executives can only infer what Labor Department regulators will spell out in their exemption based on the questions and the kind of information DOL lawyers have asked the companies to supply.

Regulators appear to be setting guidelines around IMO sales volumes, business history and precedent, reserving minimums and to a lesser extent, adequate errors and omissions protection coverage. But the regulators could settle on a mix of all three, or favor some criteria over others.

Setting IMO reserving or capital requirements is a critical balancing act.

Reserves that are set too low risks imposing a meaningless standard, but reserves that are set too high would exclude the bulk of the IMOs. And that is inconsistent with the thinking behind granting IMOs a financial institution exemption, Ashton said.

Assuming a preamble, the exemption document could range up to 40 pages, he said. Only insurers track individual IMO sales data.

One IMO, Topeka, Kansas-based Advisors Excel, did $5.3 billion in annual annuity premium volume in 2015 with insurers.

Another three IMOs close between $2 billion and $4 billion in annual annuity premium volume. The next group of six to eight IMOs close between $1 billion and $2 billion in annual annuity premium volume.

The rest of the IMO industry is bunched in the hundreds of millions of dollars in annual annuity premium volume.

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].