Suit: Agents, IMOs Can’t Satisfy BIC

Independent insurance agents working through independent marketing organizations, or IMOs, to sell fixed indexed annuities can’t satisfy exemptions afforded them under the Labor Department’s fiduciary rule, according to a legal challenge to the rule.

Working under the exemption is seen as critical if independent agents are going to continue earning a commission on the sale of popular fixed indexed annuities within retirement plans.

Under the new Conflict of Interest rule, parts of which kick as early as next April, DOL regulators require a “financial institution” — in this case a life insurance or annuity company — to certify that a transaction is in the best interest of a retirement investor.

But independent agents report to an IMO, which are not considered financial institutions under the rul, and those agents will not be able to satisfy the requirements of the Best Interest Contract Exemption, or BICE, plaintiffs argue in their legal challenge.

As a result, independent agents “will be forced to exit the fixed-indexed annuity market,” unless an insurer, a broker-dealer or registered investment advisor agrees to bear responsibility for an insurance distribution channel over which insurers, broker-dealers or RIAs do not have 100 percent control, the suit argues.

Several top insurance executives have balked at signing off on transactions completed by independent insurance agents and IMOs remain confused about their role — if any — they fill in the context of the independent agent under the new rule.

“Those options are not viable for most insurance-only licensed agents working through an IMO who offer fixed-indexed annuities because they are not registered representatives licensed to sell securities, and only a limited number of positions are available with insurers that use a captive agent system,” the 74-page lawsuit claims.

IMO managers say that there’s no danger of the collapse of the independent insurance agency system but they, along with many insurance executives, agree that changes to insurance agent compensation structures are on the way.

The challenge, filed by nine co-plaintiffs in U.S. District Court, also alleges that the Labor Department never provided adequate notice when it reversed itself and required the sale of fixed indexed annuities and group variable annuities to meet the higher and more burdensome standard of the BIC.

Opponents of the Conflict of Interest rule and its wide-ranging effects on independent agents and IMOs are included within broader arguments that the DOL has stepped far beyond its bounds in regulating investment advice into retirement accounts.

DOL: A ‘Deliberate, Open Regulatory Process’

Secretary of Labor Thomas E. Perez defended his department’s yearlong rule-making process and on Thursday hit back against his industry critics.

Industry groups and lobbyists were “suing for the right to put their own financial self-interest ahead of the best interest of their customers,” he said.

“This rulemaking was one of the most deliberate, open regulatory processes in recent memory,” Perez also said in a response from the Labor Department.

His staff conducted “countless meetings,” considered thousands of comments from the public, held days of public hearings and spent hours with other federal agencies over more than five years to develop the rule, he also said.

Consumer groups, labor unions and President Obama support the Conflict of Interest rule as a way to snuff out “self-dealing” by distributors who steer clients into financial products and services from which agents and brokers stand to gain, sometimes at the expense of and almost always unbeknownst to clients.

The eight-count suit asks the court to seeks to vacate the rule before it takes effect. The entire rule is scheduled for implementation by Jan. 1, 2018.

Organizations representing life insurance and annuity companies, IMOs and agents weren’t listed in the complaint filed Wednesday, but some industry experts say it’s only a matter of time before these groups also go to court.

The National Association of Fixed Annuities earlier this year authorized its board to enter into legal action against the DOL.

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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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].