On August 12, LifeHealthPro chatted with Jason Smith, chief executive officer of Clarity 2 Prosperity, one of six independent marketing organizations (IMOs) seeking to become financial institutions under the best interest contract (BIC) exemption of the Department of Labor's fiduciary rule.
In this installment, we talk with Bradford Campbell, an attorney at Drinker Biddle who is former assistant secretary of labor for employee benefits and past chief of the DOL's Employee Benefits Security Administration (EBSA). Counsel to four of the six IMOs, including Clarity 2 Prosperity, Campbell offered new details on the application process, hurdles still to be surmounted, and potential sticking points related to pending litigation over the DOL rule.
Among the last: determining what is reasonable compensation for producers and the legal risks that IMOs and their affiliated agents and advisors face under the rule. The following are excerpts from our interview.
LifeHealthPro: Why were the four IMO applications you're overseeing necessary?
Campbell: The Department of Labor has dramatically expanded the definition of fiduciary advice so that sales of insurance products subject to state laws would now also be covered by a federal fiduciary standard of care. The compensation that insurance producers traditionally receive, a commission based on a percentage of the sale, would thus technically be illegal under this standard.
The DOL rule provides, however, for a best interest contract exemption that allows agents to get paid via commission, subject to certain conditions. If you follow the BICE's provisions, you can continue to receive commissions within certain limits.
But the DOL set up the BICE to be a contract between a financial institution and product purchaser. Whereas the insurance agent or broker is involved in executing the contract, a financial institution — an insurer, broker-dealer, registered investment advisor, bank or trust company — must sign the best interest contract.
That's crated a hole, as many insurance products are marketed through intermediaries — independent and field marketing organizations — that the DOL didn't recognize as financial institutions under the rule.
The DOL said they intentionally did this, inviting IMOs to apply to them for a special permission to be considered a financial institution. The regulations stipulate what to include in the application, and provide discretion on the time-frame.
We don't yet know all of the DOL's conditions for securing FI status. And so whether the 6 IMOs that that applied — including the 4 our law firm is overseeing — can come to a mutually acceptable agreement remains to be seen. But so far, the DOL seems to be very serious about receiving and considering applications and has expressed a desire to move forward.
LHP: Can you detail some of the application hurdles you are familiar with?
Campbell: The DOL wants to be certain that IMOs are following a prudent and deliberative planning process that ensures advisors' product recommendations are in the client's best interest.
Every applicant is a bit different. Part of what the rule does is to impose a common standard of care — one more comprehensive than the industry norm — on insurance recommendations. To that end, all DOL-approved IMOs will need to provide more documentation and analysis relating to these recommendations.
LHP: How will IMOs assuage the DOL's concerns with respect to potential conflicts of interest when paying out a commissions?
Campbell: They'll have to develop policies and procedures to identify, and take steps to mitigate, all potential conflicts of interest. The BIC exemption states what the DOL is shooting for, but allows for flexibility in the drafting of policies and procedures appropriate for what the companies do. So I think you'll see them coming out with different solutions.
In addition, the department is concerned about how IMOs and FMOs will supervise their independent agents — whether it be in manner similar to the oversight of broker-dealers and registered investment advisors.
For example, the DOL may be looking to see whether the IMO, before entering into a contract with producers, will be doing background checks on them to ensure they're credible, appropriately licensed and meet other requirements.
LHP: One contentious issue stemming from the fiduciary rule has to do with determining exactly what is "reasonable compensation." Has this issue cropped up during the application process?
Campbell (pictured at right): Yes. The industry is concerned that the reasonableness standard is vague, though it has been in existence since the 1970s. The difference is that many of the entities now subject to the fiduciary rule — IMOs and FMOs — have never before been subject to the standard, and they may have to revamp aspects of their business model to comply. 
If the DOL prevails in litigation over the rule and the standard remains, then everyone will have to develop approaches to ensure their compensation is reasonable. That will probably include marketplace benchmarking and internal cost valuations used to justify payouts.
