Because fixed annuities and fixed life insurance are not securities, many broker-dealers treat the sales of these products by their registered reps as outside business activities. In that event, there is no obligation by the BD to supervise those sales, and they can be run directly with the issuing company and not through the broker-dealer. While this may mean the firm loses out on some or all of the commissions the RRs earn on those sales, that fact is tempered by the elimination of a whole host of oversight obligations by the BD which would be time-consuming and expensive. Perhaps even more important, by not having any supervisory obligations — obligations which could, at least theoretically, subject the firm to potential liability in the event a customer claimed he or she was damaged as a result of a firm’s failure to meet them — the firm minimizes its risks on fixed annuity sales.
Well, this approach may not be viable much longer. Among the requirements of the DOL’s new fiduciary rule – effective on January 1, 2018, not this Friday, happily (and assuming that the President doesn’t do something to delay, or simply eliminate, the institution of the rule) – if a firm wants to charge commissions on the sale of these products is the execution of a contract between the customers and a “financial institution.” In that agreement, the financial institution must represent that it is a fiduciary, and that it is acting in the customer’s best interest, among other things.
Going forward, then, broker-dealers which up to now have allowed sales of these fixed products to be handled as OBAs may be forced to sign off as the “financial institution” if they want to continue to offer these products. The bad news? They won’t be able to treat them as OBAs anymore, and will have to take on the many supervisory obligations relating to these sales that they formerly disclaimed. The good news? The BDs will be able to get paid for that supervisory work through a split of the commissions paid to the selling rep.
So, the question for broker-dealers is whether this additional revenue will be worth (1) the costs associated with these new supervisory efforts, and (2) the risk (of potential liability for not supervising adequately) these sales present. Frankly, there may not be any choice involved, if BDs want to continue selling these popular products and charging commissions for doing so.
An additional concern, although it is difficult to gauge how big of a deal it might be, is how the sales force may react if, going forward, they will now have to split commissions with the BD, commissions that, in most cases, they presently keep entirely for themselves. I imagine that most reps will have no problem sharing commissions if it means that they can rely on their BD to backstop their sales efforts, but I cannot say for sure that this will be the universal reaction.
As the clock ticks down to the effective date of the fiduciary rule, firms large and small are going to have to take a very close look at their existing business model, including products that, like fixed annuities, aren’t even run through the firm. Regulators, historically, have been less than forgiving regarding compliance with new rules, no matter how significant a change they represent, when such rules have been the subject of intense public comment, as has clearly been the case with the fiduciary rule. “I didn’t realize” simply won’t cut it as an excuse for failure to meet the new requirements.
 Even when these non-securities are sold as OBAs, BDs can still get paid for the efforts they make, even though those efforts are not, technically speaking, supervisory in nature. But, the lion’s share of the sales commissions go to the selling reps.