DOL Fiduciary Rule Causes Pullback on Sale of Annuities, Funds by Insurers

WASHINGTON — State Farm Insurance says it will not be accepting liability under the Best Interest Contract (BIC) on the sale of annuities or mutual funds by the more than 12,000 of its agents throughout the U.S. who have licenses to sell securities.

At the same time, Allstate, USAA and Nationwide, three other insurers with large property casualty divisions whose captive agents also sell investment products, appear to have decided to remain in the commission investment business.

However, in comments to LifeHealthPro, these companies declined to be specific about how they will comply with the new Department of Labor regulation fiduciary standard rule.

One reason for that is that they could be awaiting the disposition of various lawsuits that seek to delay implementation of the rule pending further court proceedings.

This rule is being implemented in stages, with the first deadline April 2017. It requires agents and advisors to act within their clients’ best interests when selling investment products for a fee or commission into their customers’ IRA and 401 (k) accounts under the Employee Retirement Income Security Act of 1974 (ERISA). Currently, the sale of these products is covered under the less strict suitability standard.

In comments in August, Jason L. Smith, CEO and founder of Clarity 2 Prosperity in Cleveland, an independent marketing organization, theorized that issuers and distributors are delaying action until they see what the courts do.

His firm has filed to offer the best interest contract exemption (BICE) to its independent agents by applying to be a “financial institution” under Department of Labor rules. But only six IMOs have applied for FI status, Smith said. Many others may be awaiting action on the various lawsuits. “I think many are putting their head in the sand and hoping that through the lawsuits the whole DOL thing goes away,” Smith said.

A federal district court in Washington, D.C. heard arguments Aug. 25 in one case filed by the National Association of Fixed Annuities. The judge declined to rule immediately, but appeared to indicate that NAFA didn’t appear to meet the threshold required to delay implementation of the rule.

State Farm’s actions, however, offer insight into the potential reaction by various businesses within the financial services industry to the new rule. State Farm and Allstate may primarily sell auto and home insurance to customers nationwide, just as USAA does to military or retired military personnel worldwide. But investment products are an important part of their portfolios.

Many of their agents are licensed to sell fixed annuities through state licenses and variable annuities and mutual funds through securities licenses.

Two-thirds of State Farm’s 18,000 agents sell investment products, for example.