Independent marketing organizations will have a 16-month grace period before they have to follow the Department of Labor's new IMO exemption in the fiduciary rule.
Qualified IMOs only need to show that they are making a good faith effort and are “presently taking steps to put in place the systems necessary” to meet best interest contract standards, and that the IMO “fully intends to comply with all the applicable conditions for such relief after the expiration of the transition period,” DOL documents said.
The period would start with the rule's effective date of April 10 and expire Aug. 15, 2018. Under the new Best Interest Contract Exemption (BICE) for Insurance Intermediarie exemption in the fiduciary rule, qualified IMOs will be able to sell fixed indexed annuities as financial institutions and receive commission-based income.
DOL regulators said they want to make sure the largest IMOs are tightly regulated as the “super-IMOs” could potentially act in a supervisory capacity for other smaller IMOs.
Of the 22 IMO financial institution applications pending before the DOL, only seven — those with an average annual fixed annuity contract sales volume averaging at least $1.5 billion in premiums over each of the three previous fiscal years — are even eligible to qualify as financial institutions for the BICE for Insurance Intermediaries exemptions.
IMOs with $1.5 billion or more in annual premium are Advisors Excel, Annexus, InForce Solutions Group, Financial Independence Group, AmeriLife Group, Futurity First Financial Corp, and Gradient Insurance Brokerage, according to sales disclosure estimates on file with the DOL.
Another four IMOs would qualify because they sell at least $1.5 billion in annual fixed annuity premium, but have not applied for the exemption, said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink, publisher of the indexed life and annuity industry tracker Wink’s Sales & Market Report.
Banks, insurance companies, securities brokers and investment advisor intermediaries were identified as financial institutions when the rule was issued last April, but insurance intermediaries were left out and included in the separate BICE for Insurance Intermediaries issued last week.
Many of the requirements in BICE for Insurance Intermediaries mirror the requirements of the standard BICE and meeting the terms of the exemptions is a must for distributors seeking to retain the income from commissions and overrides.
IMOs and advisors that intend to continue selling under the BICE for Insurance Intermediaries between April 2017 and August 2018 must:
Show they taking steps to put in place systems necessary to meet impartial conduct standards and disclose fees, compensation and conflicts of interest.
Indicate that they are adhering to a best interest standard when they recommend a product to investors and prove that any direct or indirect compensation they received from the transaction was “reasonable compensation.”
Follow all applicable disclose obligations under state insurance laws with respect to the sale of fixed annuity contracts.
Approve in advance all written marketing materials used by advisors.
Designate “a person or persons, identified by name and title or function” responsible for addressing conflicts of interest and monitoring advisors’ adherence to impartial conduct standards.
30-day comment period ticking
BICE for Insurance Intermediaries are part of a package of new rules raising investment advice standards into retirement accounts and IMOs are expected to comment on these latest exemptions as part of the 30-day period which began Friday, Jan. 20.
Rules raising investment advice standards, which are scheduled to begin April 10, could be delayed or scrapped altogether under the Trump administration.
The BICE for Insurance Intermediaries offers exemptions to IMOs as a class of financial institution, not as an individual IMO applicant.
IMOs receiving financial institution status as part of a class exemption would find themselves on a par with regulated financial product 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 BICE terms are upheld. BICE 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 60 percent 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.
Many IMO executives and industry experts consider the requirements for financial institution exemption unworkable and IMO executives they were surprised at how high DOL regulators had chosen to set the eligibility bar.
But DOL regulators point to a high bar as necessary precisely because IMOs are not regulated in quite the same way as other financial institutions.
IMOs will still responsible for selling huge volumes of fixed indexed annuities and will make as many as 227,000 annuity disclosures every year to retirement plans and individual retirement accounts, the DOL estimates.
Costs for IMOs
Even for the largest IMOs, meeting the conditions of the BICE for Insurance Intermediaries won’t come cheap.
IMOs will distribute an estimated 681,000 disclosures and contracts during the first year and 501,00 disclosures and contracts annually during subsequent years, according government agency estimates.
Preparing and disseminating the contracts will entail the equivalent of 69,000 hours during the first year and 66,000 hours annually after that, for an annual cost of $10.2 million in the first year and $10 million annually after that, according to Lyssa Hall, director of exemption determinations within the Employees Benefits Security Administration.
Paperwork connected to outsourced labor, materials and postage will come to $126.4 million in the first year and $31.6 million annually in subsequent years, the DOL also estimated.