IMO Distribution In A Post-Rule 151A World

Fixed indexed annuities since their inception have been distributed to agents overwhelmingly by independent marketing organizations (IMOs).

With the December 17, 2008 approval of Rule 151A by the Securities and Exchange Commission, and assuming no successful judicial or legislative challenges, a dramatic transfer to federal securities regulation will occur on January 12, 2011. This will affect product design, regulatory sales oversight, and distribution certification and compensation.

The very existence of some FIA-heavy distributors is at stake unless they commit to major financial, structural, and operational changes.

Traditional fixed annuities are specifically excluded, and IMOs will be unaffected to the extent they distribute those products. Traditional fixed volume may actually increase as some carriers, IMOs and agents bow out of FIAs. These conclusions are preliminary since, as of January 5, 2008, the Rule has yet to be published.

Those who attended the SEC’s open meeting on the Rule or saw the subsequent recorded version found clues to the future in the commissioner’s comments. The staff’s motivating reasons for absorbing FIAs into the securities world were senior consumer protection and the product’s risk of loss to consumers. Therefore, the future probably reflects extensive disclosure of what the SEC views as risk and incorporates significant protections for seniors from what the Financial Industry Regulatory Authority views as unsuitable sales. That means prospectuses and case-specific sales supervision.

A sea change will occur in product design, for 2 key reasons.

First, state standard nonforfeiture laws may no longer apply, so companies may relax guarantees at will. IMOs will need to develop new marketing and sales methods incorporating this change in value proposition.

Second, if the SEC uses variable annuity approval standards, it may prohibit currently allowed levels of bonuses, total sales compensation, surrender charge levels and lengths and two-tier designs.

Where state regulation of the new FIA-security goes is unclear.

Some IMOs will learn to work with broker-dealers, the gatekeepers of securities distribution. Some B-Ds may want to avoid IMOs entirely by providing all marketing support services in house, but this is unlikely to be prevalent given the relatively small size of the FIA industry and B-Ds’ concentration on “true securities.” Few will get direct contracts with carriers; it’s a recipe for fewer sales.

There are thousands of B-Ds, but an IMO will be restricted to doing business with agents who have their registration placed with a B-D where the IMO has established a selling agreement. The only way to have complete control of recruitment and marketing is to own one’s own B-D.