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Regulation and Compliance > Federal Regulation > DOL

DOL Posts Indexed Annuity Fiduciary Rule Exemption Draft

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The U.S. Department of Labor wants to let indexed annuity distributors act as financial institutions under its new fiduciary rule.

But only if those distributors generate more than $1.5 billion in annual fixed annuity contract sales, according to a draft proposal that appeared Wednesday in the Federal Register.

The DOL fiduciary rule sets standards for how retirement plan advisors should relate to retirement savers.

A proposed “class exemption” from the rule requirements could apply to the independent market organizations in the indexed annuity business, according to the 220-page proposal.

The exemption would give an Independent Marketing Organization (IMO) two main options.

An IMO could let the insurer that issues an indexed annuity supervise the agents. The insurer could keep tabs on whether agents were marketing the annuity properly, and whether excessively high commissions were skewing their sales recommendations.

Or, if an IMO wanted to use the proposed class exemption, it could serve as the financial institution. An IMO financial institution could earn money from insurers for selling indexed annuities to “protected retirement investors,” and it could share that ability with its agents.

The definition of “protected retirement investors” would include 401(k) plan participants, individual retirement account owners, and sponsors of retirement plans with up to $50 million in assets.

In addition to generating at least $1.5 billion per year in sales of indexed annuities and traditional fixed-rate annuity contracts, a would-be IMO financial institution would have to go through an annual auditing process, have a responsible person review pending indexed annuity sales before sending the applications to the insurers, and give agents annual class exemption compliance training.

The IMO financial institution would also have to have cash, insurance or other means to pay the claims resulting from any violations of the class exemption requirements. The value of the liability claim reserves would have to equal to at least 1 percent of the IMO’s average annual fixed annuity contract sales.

Getting fiduciary status might cost an IMO an average of about $6.6 million. Operating as a financial institution might cost an average of $1.7 million per year, officials say.

‘Special risks’

EBSA drafted the class exemption to flesh out the final version of the DOL fiduciary rule, which came out in April 2016. The rule is supposed to prevent conflicts of interest, such as high commission payments, from pushing retirement advisors to sell the wrong products to the wrong people. The rule itself is so strict that, if it were applied as written, it could eliminate many types of investment product sales, by blocking the sellers from earning commissions for selling the products.

Back in April, EBSA developed a Best Interest Contract Exemption to let companies pay commissions for the sale of many traditional retirement investment products. The BICE system requires a financial institution to supervise an advisor. The advisor must acknowledge fiduciary status, get reasonable compensation, give advice that’s in the investor’s best interest, and disclose fees and potential conflicts of interest.

EBSA officials say they are trying to create a new class exemption for indexed annuity distributors because 22 distributors asked for a chance to apply for financial institution status, and because they believe an indexed annuity is a product that looks simpler than it really is.

In 1984, the DOL created such an exemption, Prohibited Transaction Exemption 84-24, which freed all annuity contract sales from the DOL conduct standards then in effect.

When the DOL created the new fiduciary rule, it also narrowed PTE 84-24. The revised PTE 84-24 applies only to what the DOL calls fixed-rate annuities, or annuities designed so that the crediting rates do not change at all.

EBSA officials say they now want to create an exemption that would apply to all “fixed annuity contracts.” The term “fixed annuity contracts” would include both fixed-rate annuities and indexed annuities. Indexed annuities guarantee payment of a minimum crediting rate, along with the potential to earn extra payments based on the performance of an investment index, such as the Standard & Poor’s 500 Index.

“Fixed indexed annuities, with their blend of limited financial market exposures and minimum guaranteed values, can play an important and beneficial role in retirement preparation,” officials say. “At the same time, however, these annuities, which are anticipated to be the primary type of fixed annuities sold under this exemption, often pose special risks and complexities for investors.”

Consumers may not understand how the insurers set the crediting rates, or how surrendering contracts early could force them to pay big surrender charges, officials say.

In some cases, officials say, insurers appear to have the right to change the contract terms while the contract is in force, or even to change the terms during the period when a contract holder who surrenders a contract must pay a surrender charge.

Officials ask whether they should limit access to the proposed indexed annuity class exemption to ”contracts that do not permit insurers to change critical terms during periods in which the customer is subject to a surrender charge of penalty.”

EBSA officials say in the introduction to the class exemption proposal that they had trouble getting information about the IMO industry. The EBSA staff relied heavily on data from Windsor, Connecticut-based LIMRA, and on articles from insurance news sites, including articles by Warren S. Hersch and Arthur D. Postal.

EBSA officials believe that indexed annuity sales increased to $64 billion 2016, from $54.5 billion 2015, and that there might be about 350 IMOs distributing indexed annuities in the United States.

All of the IMOs that asked for financial institution status had 2015 fixed annuity contract sales over $1.5 billion, and two had sales over $4 billion, officials say.

Officials say any IMO that feels the proposed class exemption requirements are too difficult to meet could distribute fixed annuities without becoming a financial institution, by working with an insurer and using the BICE standard, rather than the proposed standard for indexed annuity distributors.

EBSA has also been working on other fiduciary rule projects. Late last week, for example, the agency posted a batch of informal fiduciary rule guidance aimed at investors.

Republicans in Congress have talked about wanting to do what they can to repeal, block or soften many Obama administration regulations. There’s no guarantee that the DOL fiduciary rule will take effect as the Obama administration had expected, or that the Trump administration will move ahead with work on the indexed annuity distributions class exemption.

The draft lists Brian Shiker and Erin Hesse as the main contact people for the proposal. Both work in the Office of Exemption Determinations at EBSA.

Comments on the draft are due in 30 days.

If the proposal takes effect as written, the exemption would available starting April 10. IMOs could qualify for the exemption using a simpler version of the full requirements from April 10 through Aug. 15, 2018.


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