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The Proposed Rule Will Sock It To Index Annuity Distributors

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The Securities and Exchange Commission’s proposal to regulate fixed index annuities as securities could result in an estimated loss of $852 million to insurance industry distribution channels.

This is a rough total, based on a conservative estimate of additional expenses to insurance agents with lost revenues plus losses to insurance marketing organizations (IMOs), as follows.

Cost to agents. There may well be 100,000 annuity agents that could be affected by the proposal. A 3-year old Advantage Compendium survey found that 45% of FIA producers did not have securities registration. So, to continue selling FIAs under the proposal, these 45,000 agents would need to train for and pass at least a Series 6 exam, and then hook up with a broker-dealer that would charge fees and or share in the agent income.

In addition, the agents would more likely than not be required to send every scrap of paper they share with the public in their non-securities business to the B-D’s compliance department so the B-D could either approve use of the public marketing letter/script/product, or affirm it is not in any way securities-related.

If fees charged by the B-D and its self-regulatory organization, the Financial Industry Regulatory Authority, averaged $500 a year, the additional cost would be $22.5 million. This does not factor in the agent-hours lost in productive time usually spent with customers but now spent in preparing forms and sending in non-securities sales and public materials because of FINRA’s lack of clear guidelines on what B-Ds should examine.

Total street level agent commissions paid out on FIAs in 2007 amounted to an estimated $2 billion, based on my figures. If agent commission levels remained the same–and I believe they would drop–and if the B-D were to take only 10% of that commission as its share–and my recent look at B-D payout grids shows typical takes of 10% to 40%–the annuity agents would lose $200 million in income.

Between securities registration fees and even a low level of commission sharing, the proposal would cost agents roughly $222.5 million a year. In addition, there will be agents who cannot or will not obtain securities registration and will be forced to stop selling index annuities.

Cost to IMOs. In general, IMOs do not provide a direct supervisory role, although they may assist carriers in ensuring that consumer-related requirements for policy sales are performed by the agent.

If FIAs become securities, the B-D would then bear total responsibility for the supervision of agent FIA sales. In that case, B-Ds would be responsible for FIA product selection, agent training, ensuring suitability of the sale, delivering the policy and even how the agent prospects. If IMOs become involved at all, it would be as annuity wholesaler for the carrier at a compensation rate of 0.15% to 1%.

If the SEC proposal passes, FIAs sales would likely fall by 60% and IMO compensation would be dramatically reduced–from around $500 million-$700 million a year today to $60 million-$200 million a year under the proposal.

Overall, most of the losses would be incurred by small entities. This would have a significant effect on the economy, and it would result in a major increase in costs for insurance agents.