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.

Of course, all FIA sales will go through the “grid,” which may further lower compensation to the end producer. The B-D’s cut is a new bite out of the compensation apple.

Non-IMO competition may surge if Rule 151A holds up. With its status clarified, heretofore dormant distribution may grow market share, e.g., banks, wirehouses, career agencies and B-Ds whose only insurance support until now has been VAs.

For IMOs to get paid for their recruiting and marketing support services, they must find their way into the distribution hierarchy administered by FINRA. Marketing services provided by IMOs would also have to comply with FINRA rules.

All IMO employees with sales contact would need the appropriate securities registrations. It is unclear what those are at this time. Logical candidates are Series 6 and 63 which are required for VA sales, although, since there is no FIA emphasis on these exams, new registration may be developed.

Of course, agents must also be registered.

What happens until January of 2011? With its seemingly merciful refusal to apply Rule 151A retroactively, the SEC may have placed non-registered reps on hold for 2 years, but registered reps are another matter. Realizing these products “should be” securities and ultimately will be, just as FINRA warned in NTM 05-50, FINRA may pressure B-Ds into early adoption for supervision and placing FIAs “on the grid.”

A number of insurance companies as well as industry organizations (National Association for Fixed Annuities, Milwaukee, Wis., and others) are considering litigation or legislative remedies to squash what they feel is an unprecedented overreach by the SEC.

The SEC’s own Commissioner Parades, in casting his lone dissenting vote, laid out a roadmap for challenge. He concluded that the Congress has prohibited the SEC from changing Sec 3(a)(8) of the 1933 Securities Act as it has.

Rule 151A is almost certainly bad regulation whether or not one likes the results–results which could see less agent choice and less consumer choice.

What does an IMO do now? Many smaller IMOs will not have the resources or capital to compete after 2010. Activity on some of the issues above must proceed immediately for an IMO to prepare to support FIAs in the new world. As with every change, there is opportunity for those who can seize it.

Michael Tripses is president of Creative Marketing International Corporation, Overland Park, Kansas. His email address is mtripses@cmic.net