Of all the stakeholders affected by the Labor Department’s fiduciary rule, providers and marketers of fixed indexed annuities have the strongest case that the rule will create irreparable harm for industry, says Sweeney. The Administrative Procedure Act instructs courts to consider the extent to which rulemaking may negatively impact affected industries.

During the proceeding, attorneys for NAFA argued the Labor Department's “irrational decision making has literally turned the industry upside down.”

The majority of fixed indexed annuities are sold by independent insurance agents and distributed by independent marketing organizations. The finalized fiduciary rule moved the regulation of fixed indexed annuities to the purview of the rule’s Best Interest Contract Exemption.

In order to qualify for the exemption to sell fixed indexed annuities, that contract must be signed by a qualified financial institution and individual investors. Those institutions include insurance companies, broker-dealers, and registered advisory firms. The rule does not include the independent marketing organizations that are the primary distribution channel for fixed indexed annuities as a qualified financial institution.

Attorneys for NAFA argued that independent marketing organizations will therefore not be able to comply with the Best Interest Contract Exemption, and that they will be forced out of business, according to analysis of the hearing provided by Sweeney.

Attorneys for the Justice Department and the Labor Department countered the claim of irreparable harm by giving Judge Moss four proposed solutions for independent marketing organizations to comply with the rule: affiliate as a broker-dealer; contract with insurance carriers to assume some of the monitoring of independent agents; establish a captive agent model; or apply for an exemption with the Labor Department to be considered a financial institution.

But that post hoc rationale is a “day late and a dollar short,” argued NAFA’s legal team.

“Counsel cannot fill in reasoning that the agency did not offer” in the rule, NAFA’s lawyers said.

Way forward for IMOs

Mike Kalen, CEO of Futurity First Financial Corp., an independent marketing organization that does about $2.5 billion in annuity sales, 70 percent of which are fixed indexed annuities, estimates there are 100 to 150 independent marketing organizations throughout the country.

“We’re working to find a solution here,” said Kalen in an interview. “There is no defined path for an IMO to qualify as a financial institution other than to apply with the DOL.”

Kalen said Futurity First has begun the application process to qualify as a financial institution, but uncertainty remains as to when or if guidance will be issued by the Labor Department, and what it will look like.

That absence of clarity from regulators is a problem. The good news from Kalen’s perspective is that the Labor Department has reached out to independent marketing organizations since finalizing the fiduciary rule. “We are encouraged by that,” said Kalen.

Kalen believes that the role of independent marketing organizations will be indispensable to complying with the rule’s Best Interest Contract Exemption, and that the role of an independent agent can best serve a fiduciary standard, given that they are not beholden to recommending one product over another. Futurity First lists more than 20 carriers it works with on its website.

“The nature of an insurance company is to sell their product. We don’t think that as a product manufacturer they are best suited to sell their products and meet the new fiduciary requirements,” said Kalen.

IMO options

Kalen is in agreement with NAFA’s claim that the rule does the fixed indexed annuity industry irreparable harm.

But as the leader of an independent marketing organization with a national distribution reach, he is far from fatalistic as to Futurity First's, or other independent marketing organizations’, imminent demise.

He sees two ways forward for the organization he leads:

Under one scenario, the Labor Department provides clear, workable guidance for how independent marketing organizationscan apply and qualify as a financial institution under the Best Interest Contract Exemption.

In another scenario, courts provide the fixed indexed annuity industry some relief. That does not necessarily have to come in the form of a complete stay of the fiduciary rule, explained Kalen. Courts, for instance, could uphold the rule, but require the Labor Department to open a new comment period specific to the question of fixed indexed annuities' relevance to the Best Interest Contract Exemption. From that, regulators could take industry’s full input and craft functional guidance, says Kalen.

A third potential scenario is one in which neither of the above occur. In that circumstance, Kalen acknowledges that the existential claims NAFA made in its argument to the D.C. circuit—that upwards of 20,000 insurance agents will be forced from the market, ultimately denying retirement savers of needed guaranteed income options — could become a reality.

For his part, Kalen says he has faith a workable solution will emerge. “We are moving forward to be fully compliant with the best interest contract exemption,” he said. Already, Futurity First is working with carriers to understand ways the firm could help insurers educate and monitor independent agents selling fixed indexed annuities under the Best Interest Contract Exemption.

“The insurance industry is highly sensitized to finding solutions — we’ve dealt with these kinds of regulatory changes before,” he added.

In principal, moving independent marketing organizations and their channels of independent agents to a fiduciary standard of care “is not a big jump,” said Kalen, who thinks the insurance industry’s efforts to improve compliance with the suitability standard over the past four years is a “good starting point to move to the more stringent fiduciary standard.”

That said, the Labor Department’s fiduciary rule creates many practical and technical implications for the sale of fixed indexed annuities, including how commission compensation will look going forward, an industry standard to reestablish what reasonable compensation will look like, and developing standard technology to help all points of distribution comply with the rule.

“There is a lot of work to be done,” said Kalen. “What we’re wondering now is if we will have the time to do it all.”