The fiduciary rule is expected to massively disrupt how FIAs are marketed to retirement savers. About 60 percent of the roughly $50 billion annual FIA market is sold through independent insurance agents who contract with independent marketing organizations (IMOs) and field marketing organizations, which in turn contract with insurance carriers.

Fixed indexed annuities and all other retirement investments sold on commission to IRAs will have to comply with the Best Interest Contract Exemption, which regulators crafted to protect investors from receiving conflicted investment advice.

The DOL created four classifications of financial institutions that can sell FIAs under the BIC Exemption: broker-dealers, banks, insurance companies, and registered investment advisories. A provision in the rule allows for independent marketing organizations to apply for a financial institution exemption, which would allow them to market FIAs under the BIC Exemption.

Last month, Moore published a blog post confirming that the DOL is crafting a class-wide exemption for IMOs, citing sources in the Labor Department.

The chances of the exemption being released before the rule’s first implementation date next April 10 is strong, Moore told BenefitsPro, though her contacts at Labor have not confirmed a release date.

Will IMOs survive?

But even with the exemption, most IMOs will struggle to survive, she says, raising the question of whether insurance carriers will continue to sell FIAs through marketing organizations and independent insurance agents.

“Ultimately, I think the fiduciary rule has the power to whittle down the number of IMOs from 350 to 12,” said Moore. Compliance costs will be too much for smaller IMOs to absorb, she explained.

And the class-wide exemption the DOL is planning to issue does not mean all IMOs will automatically qualify as a financial institution.

That’s because the exemption will require IMOs to hold cash reserves in order to guarantee they can make investors whole if they sue for breaching the BIC Exemption.

Exactly what those reserve requirements will be, or how the Labor Department will calculate them, is unknown, and something regulators are struggling to assess, says Chip Anderson, executive director of the National Association of Fixed Annuities, which represents insurance carriers, IMOs, and independent agents.

“At this point, NAFA has no idea how the DOL will set the guidelines for capital requirements,” said Anderson in an interview.

“I think the DOL has a big challenge in understanding this massive distribution system and coming up with reserve requirements that everyone will be comfortable with,” added Anderson.

NAFA is appealing its lawsuit against the DOL rule in the District of Columbia Circuit, and has filed for an emergency motion to have the fiduciary rule’s implementation date delayed by as much as two years.

In the emergency motion, attorneys for NAFA argue that the Labor Department’s delay in issuing its exemption for IMOs will make it impossible for the organizations to comply with the rule by next April. In November, the lower court in the D.C. circuit upheld the fiduciary rule.

A lawsuit brought in Kansas federal court by Market Synergies, a Topeka, Kansas-based independent marketing organization, raised claims similar to NAFA’s. The Kansas court also ruled to uphold the fiduciary rule. Requests for comment from Market Synergies were not returned. Two other lawsuits against the rule are pending in Texas and Minnesota federal courts.

Beyond the challenge of establishing guidelines for reserve requirements, Anderson says it is also unclear which regulatory agency will oversee the capital requirements going forward.

The Labor Department, like all other federal agencies, has limited resources, which can be expected to be spent on implementing the rule, facilitating industry’s compliance, and ultimately, enforcing the rule.

The task of overseeing reserve requirements may fall to state insurance regulators, but Anderson said that prospect raises its own uncertainty. “Will the states want to take responsibility for overseeing a federal law? I think there is a real conflict there. States don’t have authority over federal law.”

Regulators lacked understanding of IMO role in market

Moore, who was sourced by regulators and attorneys at Labor during the rulemaking process, says the agency lacked a good understanding of FIA distribution channels even as it promulgated the fiduciary rule.

She also said she believes regulators have been genuine in addressing the concerns of IMOs and other annuity advocates.

Nonetheless, she worries that the rule will adversely impact the independent agent channel. Moore expects FIA sales to be down by as much as 20 percent next year.

“The reality is that independent agents have driven competition in the annuity market,” said Moore. “Without that drive we are going to see the cost of products increase. From that standpoint I am disappointed. I’ve always seen the independent agent as valuable for the market and for investors.”