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Proposed DOL fiduciary rule exemption could impact IMOs

Some in the annuity industry plan to step up efforts to push back the rule's April 2017 applicability date

IMOs may have to meet a capital reserve threshold to become financial institutions under a proposal filed by the Labor Department. (Photo: iStock)
IMOs may have to meet a capital reserve threshold to become financial institutions under a proposal filed by the Labor Department. (Photo: iStock)

The U.S. Department of Labor sent a proposed exemption to the Office of Management and Budget last week related to the classification of IMOs as financial institutions under the department’s fiduciary rule.

Related: DOL 101: The fiduciary rule's impact on IMOs

Michael Trupo, a spokesman for the Labor Department confirmed the proposed exemption is under review, although the content is not yet finalized. Before it is finalized, the exemption would be subject to a public notice and comment process, Trupo said.

The DOL’s fiduciary rule, released in April of 2016 and set to go into effect in April of this year, designated carriers, banks, broker-dealers and RIAs as financial institutions allowed to sign best interest contracts with consumers, leaving IMOs in an uncertain position with respect to the distribution of fixed annuity products.

Several IMOs have applied to the DOL to receive a designation as a financial institution.

“It appears IMOs may ultimately be recognized as financial institutions but with a unique set of requirements,” W. Andrew Unkefer, president of Unkefer & Associates, said via email. “One of these requirements appears to involve a capital reserve threshold. If this is true, IMOs will be held to a much higher standard compared to other financial Institutions.

“When you open an RIA, you have no such requirement,” he said.

An individual could create an RIA without any substantial capital. A broker-dealer could be financially failing but meet the definition of a financial institution as naively defined by the DOL. Last year, the FDIC reported five bank failures, yet they too would meet the financial institution definition, Unkefer continued.

“The fixed annuity industry must continue to ask the incoming administration to move the applicability date back a minimum of 12 months so these sorts of inconsistencies can be corrected," he said, adding that such a move would "allow Congress to bring forth a law created by the representatives of our citizens rather than adopt a far reaching administrative decision affecting trillions of dollars in retirement accounts and how, when and where the people receive their advice.” 

Mike Kalen, CEO of Futurity First Financial Corp. (FFFC), a large U.S. IMO, said the company has been in contact with the DOL throughout the process and is part of IMO efforts attempting to gain equal footing to act as a financial institution. The lack of a clear path with only three months to go before implementation of the new rule puts additional pressure on IMOs and insurance agents to get ready to meet the new requirements. Kalen said the DOL has asked for input from IMOs on requirements, which leads the industry to believe that there may be capital or scale requirements placed on IMOs that do not exist for other financial institutions.

"It's all speculation at this point," said Kalen. "Regardless, we need to know the proposed rules so we can comment formally.

"We have contended since the regulation has been published that there is a gaping hole in the eligibility rules for IMOs and insurance agents who provide a critical role in providing retirement advice to retirees," continued Kalen. "The current regulation does not provide insurance agents with the appropriate support provided to other types of advisors. IMOs have stepped in to fill this void and deserve equal treatment to other financial institutions."

See also:

DOL rule will force consolidation of broker-dealers, Cerulli report says

The DOL fiduciary rule's future remains murky

Icahn named special Trump adviser to roll back regulations

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Nichole Morford

Nichole Morford
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