The Department of Labor (DOL) fiduciary rule, as it currently stands (see Details Emerge on Trump Order to ‘Review’ Fiduciary Rule), would sweep sellers of increasingly popular fixed indexed annuities under the definition of fiduciaries—requiring these sellers to take steps toward compliance in just a few short months (by April 10).
This would create a daunting complication for some independent distributors of these products because under the currently drafted rule, they would potentially be ineligible to take advantage of the valuable best interest contract exemption (BIC, or BICE). Fortunately, the DOL has proposed a class exemption that would, in certain circumstances, allow these independent insurance intermediaries to sell fixed indexed annuity products and continue to receive the associated compensation without creating prohibited transactions that would violate the fiduciary rule—if a specific set of criteria is satisfied.
The DOL Proposed Exemption
As discussed in more detail below, the best interest contract exemption allows financial institutions that enter into formal written contracts with clients to continue to work with advisors who will sell fixed indexed annuity products to clients (and receive the associated compensation). However, the current draft of the exemption limits the definition of “financial institution” so that it excludes certain insurance intermediaries and independent marketing organizations (IMOs) that support independent producers in their sale of financial products—the route by which most fixed indexed annuity products are sold.
These IMOs would therefore be ineligible to take advantage of the best interest contract exemption to continue selling fixed indexed annuity products for a commission. Under the proposed class exemption for IMOs, however, these sales would be permitted for sales involving fixed annuities that satisfy certain state forfeiture laws at the time of issuance and for which benefits do not vary based on the investment experience of a separate account maintained by the insurer.
The proposal would also expand the definition of financial institution to include intermediaries that have a written contract governing the distribution of the annuity products with the insurance company and the advisor (multiple tiers of intermediaries may also be permitted).
Additional requirements regarding capitalization levels, proper state licensing and submission to audits also may apply. This class exemption would grant IMOs financial institution status similar to that of broker-dealers, insurance companies and banks.
Compliance With the Best Interest Contract Exemption