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Submitted electronically: e-ORI@dol.gov

September 24, 2015

Office of Regulations and Interpretations

Employee Benefits Security Administration

Attn: Conflict of Interest Rule – Retirement Investment Advice

Room N-5655

U.S. Department of Labor

200 Constitution Avenue NW

Washington, DC 20210

RE: RIN 1210-AB32 – Conflict of Interest Rule – Retirement Advice

ZRIN 1210-ZA25 –Proposed Amendment to and Proposed Partial 

Revocation of Prohibited Transaction Exemption 84-24 

Dear Sir or Madam,

On behalf of NAFA, the National Association for Fixed Annuities1, I am pleased to 

have the opportunity to submit these additional comments on the Department of 

Labor’s proposed new definition of a fiduciary and the proposed amendments to 

Prohibited Transaction Exemption (PTE) 84-24 (collectively, “the proposed rule”).

As we made clear in our prior letter, NAFA commends the Department for 

recognizing that PTE 84-24 is the appropriate regulatory exemption for non-security 

annuities – i.e., fixed annuities – under the proposed rule. We believe that this is 

the appropriate exemption because only fixed annuities – unlike all other types and 

categories of retirement investment vehicles – offer two insurance-backed, 

contractual guarantees: guaranteed protection of principal and a guaranteed

annuitized income payout.

Given the current retirement crisis in the United States, where as many as 68% of 

all working-age Americans do not participate in an employer-sponsored retirement 

plan,

2

the Department’s inclusion of non-security annuities under PTE 84-24 will 

encourage the purchase of fixed indexed annuities for the risk-free growth of 

 

1 Founded in 1998, NAFA is an advocacy trade association, exclusively dedicated to educate and inform state and federal 

regulators, legislators, industry personnel, media, and consumers about the value of fixed annuities and their benefits to 

Americans in financial and retirement planning. NAFA’s membership includes insurance companies, independent 

marketing organizations, and individual producers, representing every aspect of the fixed annuity marketplace and 

covering 85% of fixed annuities sold by independent agents, advisors, and brokers. 

2 http://www.forbes.com/sites/laurashin/2015/04/09/the-retirement-crisis-why-68-of-americans-arent-saving-in-anemployer-sponsored-plan/
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principal and lifetime income feature these products offer. And, within qualified 

plans, our industry has the best products to provide and fund individual retirements. 

NAFA is concerned, however, that there may be confusion regarding the proper 

understanding of a fixed indexed annuity as a non-security annuity product, and 

thereby eligible under PTE 84-24. In this second comment letter we will explain 

why fixed indexed annuities are correctly understood and properly categorized as 

insurance products and are not ‘security annuities’. Both state and federal law treat

all fixed indexed annuities, including fixed indexed annuities, as purely insurance 

products, thus exempting them from securities laws or registration. Accordingly, 

NAFA believes that it is appropriate that the Department continue to include fixed 

indexed annuities as non-security annuities under the proposed modification to PTE 

84-24. 

Additionally, NAFA will address several points of clarification or modification that 

we believe the Department should consider in adopting its final rule. Finally, in 

response to your request, we propose a specific fixed annuity product class for a 

streamlined exemption.

I. All fixed annuities are insurance products – not investments 

– and provide insurance guarantees to grow and protect 

retirement assets and income

A fixed annuity contract is between the consumer and the issuing insurance 

company

As stated in the NAIC3 Buyer’s Guide for Fixed Annuities, “An annuity is a contract 

with an insurance company. All annuities have one feature in common, and it makes 

annuities different from other financial products. With an annuity, the insurance 

company promises to pay you income on a regular basis for a period of time you 

choose—including the rest of your life.”4

 

3 The National Association of Insurance Commissioners (NAIC) is the U.S. standard-setting and regulatory support 

organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five 

U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, 

and coordinate their regulatory oversight. NAIC staff supports these efforts and represents the collective views of state 

regulators domestically and internationally. NAIC members, together with the central resources of the NAIC, form the 

national system of state-based insurance regulation in the U.S. http://www.naic.org/index_about.htm

4 Buyer’s Guide for Deferred Annuities – Fixed, prepared by the National Association of Insurance Commissioners 

(NAIC), as revised 2013 (emphasis in original). State disclosure regulations require that consumers receive a buyer’s 

guide when they purchase an annuity contract. http://www.naic.org/documents/prod_serv_consumer_anb_le_2013.pdf. 
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Unlike investment vehicles, where the consumer pays the investment advisor –

typically on an annual basis – to manage and allocate his or her assets based upon 

an investment plan developed by the investment advisor and the consumer, a fixed 

annuity sale is a one-time transaction between the consumer and the insurance 

company that is facilitated by an agent. The fixed annuity contract itself is a 

contractual agreement that spells out all terms, conditions and benefits. 

All monies are paid directly to the insurance company and are never controlled or 

managed by the insurance agent. The agent never has access to the assets used to 

purchase the fixed annuity and cannot alter anything in the annuity contract. 

Moreover, all of the money used to purchase the annuity contract is credited to the 

contract account; premium payments are not offset by the payment of commission 

to the insurance agent. 

Fixed indexed annuities are a type of fixed annuity

Generally, fixed annuities can be categorized as either declared rate (or set rate) –

i.e., ‘traditional’ fixed annuities – or fixed indexed annuities. The NAIC considers 

both types of annuities to be fixed annuities, describing them as follows:

Fixed annuities guarantee your money will earn interest at least a 

minimum interest rate. Fixed annuities may earn interest at a rate 

higher than the minimum but only the minimum rate is guaranteed. 

The insurance company sets the rates.

Fixed indexed annuities are a type of fixed annuity that earns interest 

based on changes in a market index, which measures how the market 

or part of the market performs. The interest rate is guaranteed to never 

be less than zero, even if the market goes down.5

Fixed indexed annuities provide the exact same type of contractual guarantees as 

declared rate annuities – namely, that the annuity policy owner will never lose his 

or her premium or credited interest due to investment or market risk. Moreover, all 

fixed annuities are required to follow state-mandated standard non-forfeiture laws, 

reserving requirements, and disclosure laws. 

Additionally, all fixed deferred annuities (including fixed indexed annuities) must 

provide contractually-guaranteed annuitization payments, as well as the promise 

that the premium and prior interest earned will not be affected by any negative 

 

5

Ibid.
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performance of the insurance company’s investment portfolio or any negative 

performance of the market index. 

The only difference between a fixed declared rate and fixed indexed rate annuity 

is how the contractual interest is determined and calculated

In the case of a declared rate contract, the insurance company determines the interest 

rate that is to be paid. The annuity contract may allow the insurance company to 

change the rate as stipulated under the contract, but all declared rate annuities 

provide a minimum guaranteed interest rate floor, protecting the annuity owner 

against loss due to investment or market risk. Thus, the annuity owner has a 

guaranteed level of return that will always provide a guaranteed and predictable 

level of income.

In the case of a fixed indexed annuity, the credited interest is based on an external 

market index, such as the S&P 500. The contract does not directly participate in 

any security investment. The annuity owner is not directly or indirectly buying 

shares of any stock or index fund and takes on no market risk; instead, the 

investment risk is shifted to the insurance company. 

The advantage of a fixed indexed annuity over declared rate annuity for some 

retirement consumers is the opportunity to earn more interest growth from favorable 

changes in the external market index, while ensuring that the annuity owner’s 

contract value will not decrease due to unfavorable changes. Once the interest rate 

is determined and credited, fixed indexed annuities function in all ways like all other 

fixed annuities, including the predictable stream of lifetime income that is 

contractually guaranteed by the insurance company.

These fixed insurance products – both fixed declared rate annuities and fixed 

indexed annuities – are meant to be long-term retirement savings vehicles. They 

are not investments. They are not securities. 

Fixed indexed annuities are insurance products – not securities – under both state 

and federal law

Historically, the Securities and Exchange Commission (SEC) has exempted from 

federal securities regulation any annuity that was not marketed primarily as an 

investment and for which the insurer assumed the risk of loss. 6 Fixed indexed 

annuities, which were first introduced in 1995, met these criteria and have always 

 

6 17 C.F.R. § 230.151; see also American Equity Inv. Life Ins. Co. v. S.E.C., 613 F.3d 166, 170 (D.C. Cir. 2010).
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been considered exempt from federal securities laws and have been regulated at the 

state level by the state departments of insurance.

In 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (Dodd-Frank Act), Congress reaffirmed that fixed indexed annuities would 

continue to be regulated by state insurance departments as insurance products—and 

not as securities subject to federal oversight. This legislation provided fixed indexed 

annuities with a safe harbor from federal securities regulation and registration if 

certain criteria were met, ensuring the continued regulation of these products by 

state insurance departments.7

Fixed indexed annuities are not variable annuities

The NAIC Buyer’s Guide describes variable annuities as follows:

Variable annuities earn investment returns based on the performance 

of the investment portfolios, known as “subaccounts,” where you [the 

consumer] choose to put your money. The return earned in a variable annuity 

isn’t guaranteed. The value of the subaccounts you choose could go up and 

down. If they go up, you could make money. But, if the value of these 

subaccounts goes down, you could lose money. Also, income payments to 

you could be less than you expected.

This description by the NAIC highlights a critical distinction between fixed and 

variable annuities: “[t]he return earned in a variable annuity isn’t guaranteed.” 

Indeed, variable annuities are distinguishable from fixed indexed annuities in a 

number of important ways, including:

 Variable annuities are securities and are regulated as such. 

 Fixed indexed annuities are insurance products. 

 

7 Under the Harkin Amendment to the Dodd-Frank Act (section 989J), fixed indexed annuities are exempt from federal 

regulation as securities if three criteria are met: (1) the value of the insurance product does not vary according to the 

performance of a separate account, (2) the product satisfies state nonforfeiture laws, guaranteeing that the owner always 

has a minimum-protected cash value, and (3) the product is either sold in a state that has adopted suitability standards 

that are modeled after those of the NAIC, or the insurer is domiciled in a state that has adopted the Model or the insurer 

itself adopts the suitability standards on its own, subject to exam oversight. To date, 37 states (plus the District of 

Columbia) have adopted the Suitability model regulation, and insurance companies that operate on a nationwide basis 

have adopted suitability standards that meet or exceed the model regulation. Accordingly, fixed indexed annuities are 

regulated and treated exclusively as insurance products and not securities in all states.
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 Fixed indexed annuities comply with standard non-forfeiture laws, which 

includes minimum guaranteed values, whereas variable annuities are 

unlimited as to risk of loss. 

 With all fixed indexed annuity contracts the insurance company retains 

the market risk, the contract owner receives interest at a rate based on the 

referenced index’s performance and interest is paid from the company’s 

general account funds. 

The chart below demonstrates that fixed “declared rate” annuities and fixed 

“indexed rate” annuities share the same fundamental features and regulatory 

oversight, and that variable annuities differ dramatically from both of them.

 

8 Subject to surrender charge, but guaranteed at a minimum SNFL value.

ANNUITY COMPARISON CHART

Fixed Annuity Fixed Indexed 

Annuity

Variable 

Annuity

Predictable income stream X X

Principal & credited interest guaranteed8 X X

No downside market risk X X

Subject to state non-forfeiture laws X X

Regulated as insurance product X X X

Regulated as a security X

Individual’s premiums and interest held in 

the insurer’s general account X X

Individual's investment funds held in 

separate account

X

Actual gains and losses based on the 

market performance of the subaccounts X

Provides substantially predictable income 

that is contractually guaranteed X X
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II. The state regulatory system has a process that provides 

insurance product purchasers with the ability to resolve 

complaints

Insurance product purchasers have two options to pursue when trying to resolve a 

complaint or grievance. First, the consumer can reach out directly to the insurance 

company that sold the product. Upon receipt of the complaint, the insurance 

company must address the issue within a specific timeframe under the laws of most 

states and engage in good faith discussions. The insurance company must also 

comply with applicable regulatory requirements regarding documentation and 

retention periods. 

Insurance product purchasers also have the option to contact their state department 

of insurance (DOI) rather than the issuing insurance company to lodge a complaint. 

Under this option the DOI will serve as a conduit/mediator regarding the grievance 

and proposed resolution. 

As part of the regulatory oversight structure, DOIs typically include complaints as 

a topic area when performing a market conduct examination of a life insurance 

company. Moreover, the DOI for the state where an insurance company is 

domiciled will perform a detailed check of the compliance structure and complaint 

administration process when performing comprehensive periodic reviews.

For the most part, however, we rarely get to dispute resolution. In 2014 consumer 

complaints involving securities and advisors represented over 97% of combined 

annuity and securities complaints – but only .03% of total complaints were lodged 

by owners of fixed annuities.9

III. The investment education carve-out must distinguish 

educational activity from investment advice 

During the August public hearings on the proposed rule, Deputy Assistant Secretary 

Hauser asked when we might consider that an advisor’s or broker’s communications 

with potential clients “trips” the fiduciary line. NAFA believes that this is the 

 

9 Data Sources: FINRA: http://www.finra.org/newsroom/statistics; NAIC: 

https://eapps.naic.org/documents/cis_aggregate_complaints_by_coverage_types.pdf; SEC: 

http://www.sec.gov/news/data.htm; NASAA: http://www.nasaa.org/regulatory-activity/enforcement-legalactivity/enforcement-statistics/ (2013 data only).
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essential question in framing the argument for a clear and meaningful non-fiduciary 

investment education carve-out. It is critical that insurance agents are allowed to 

provide in-depth education regarding particular fixed annuity product features so 

that retirement consumers can make sound and informed retirement decisions. 

The role of the insurance agent is to educate the consumer and to make a 

recommendation based upon the consumer’s individual financial needs and goals

The role of the insurance agent in selling fixed annuities and fixed indexed annuities 

is focused on education: educating the consumer about the various features that the 

annuity offers to grow and protect retirement assets and income, and, more 

importantly, educating the insurance agent about the individual consumer’s personal 

financial situation and needs.

A fair amount of discussion during the Department’s August public hearing centered 

on the role of education in the sales transaction to purchase various retirement 

vehicles, including annuities. Assistant Deputy Hauser made the following 

comment regarding the role of the advisor in understanding the financial needs of 

the individual consumer:

So say that the person on the other end of the phone or in the office is 

talking to, you know, a 75 year old about how to invest their money and 

they say, everybody at your age should invest in such and such product, 

that's it. There's no – they haven't looked into their circumstances, 

they haven't done any individualized analysis, but they've quite 

clearly made a specific recommendation. Should that really not be 

treating, treated as fiduciary while we would treat as fiduciary a 

communication where the broker or the advisor at least made the 

minimum effort of understanding what the customer needed?10

In stark contrast to the hypothetical advisor in this scenario, before making any 

recommendation, the insurance agent who transacts fixed annuity business is 

required to fully understand the individual’s financial needs and objectives, 

considering at a minimum11 the following information pertaining to the prospective 

client before providing any advice regarding the purchase of an annuity:

 

10 Transcript of Dept. of Labor Public Hearing, August 10, 2015, pp. 136 – 137 (emphasis added).

11 Some states, and some insurance companies, require this review to include information in addition to the twelve 

points listed here. See e.g., Minnesota Stat. §72A.2013, which adds to this inquiry whether or not the consumer has a 

reverse mortgage, available at https://www.revisor.mn.gov/statutes/?id=72A.2031. 
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1. Age

2. Annual income

3. Financial situation and needs, including the source of the funds used 

to purchase the annuity

4. Financial experience

5. Financial objectives

6. Intended use of the annuity

7. Financial time horizon

8. Existing assets, including investment and life insurance holdings

9. Liquidity needs

10. Liquid net worth

11. Risk tolerance

12. Tax status

In addition to this suitability review, insurance agents, who are licensed and 

regulated under state insurance laws, ensure that the consumer has been informed 

of and understands of the various features of the annuity, such as any potential 

surrender charge period and surrender charges; potential tax penalties; limitation on 

interest returns; and features of and charges for riders, such as death benefits, etc. 

In the case of fixed annuity or a fixed index annuity sales transaction, it just isn’t 

the case that the advisor or agent makes a recommendation without first undertaking 

individual analysis to understand what the customer needs.

However, as the proposed rule is currently drafted, it is unclear whether fiduciary 

obligations would be triggered at the first instance an insurance agent provides 

educational or marketing material about a particular fixed annuity product. NAFA 

is also concerned that merely discussing distributions and rollovers with a 

prospective client would be considered investment advice, thereby triggering the 

fiduciary standard. 

Additional clarity on what would be considered non-fiduciary communications 

under the proposed rule’s investment education carve-out under Section 2510.3-

21(b)(6) is needed; the guidance should incorporate the language provided in the 

Department’s Interpretive Bulletin 96-1.
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IV. Streamlined Exemption for Annuities that Only Pay Trail 

Commission

The Department has asked whether certain investment products may pose so little 

risk that conflicts are driving the recommendation that a simple streamlined 

exemption should be created to promote such products. We suggest that a class of 

fixed annuity products meet this criteria and the public policy goals the Department 

is pursuing. Specifically, a deferred fixed annuity contract with a surrender charge 

period of no more than seven years and a commission structure that pays trail only 

to the insurance agent is that product. Such an annuity product addresses the policy 

goals of the Department in that it –

 Pays interest at a contractually mandated rate and is not subject to 

market risk throughout the deferral period, i.e. risk free growth of 

principal;

 Has a maximum surrender charge period of seven years which 

promotes the long term nature of retirement savings, shielding these 

savings from the demands of day to day expense, but still provides the 

flexibility to periodically reallocate the funds to other retirement 

savings vehicles if needs and goals should change;

 Through required annuitization provisions and optional guaranteed 

withdrawal benefit riders, is the only retirement savings vehicle that 

provides a stream of periodic payments over the life of the owner, i.e. 

a personal pension;

 Is time tested over a long history of various financial 

conditions/challenges to provide safety and security of principal and 

performance of lifetime payments due to a regulatory structure that 

ensures the long term risk nature of the industry is properly addressed; 

and

 Is subject to a comprehensive regulatory structure that ensures 

consumer interests are met as financial markets change and evolve 

and that grievances of individual consumers are properly addressed.

Moreover, by restricting the commission structure to trail payments only, the 

product mitigates any potential conflict for the insurance agent in two important 

respects. First, the trail payment, which is an annual amount paid based on the value 

of the annuity, is very much akin to the fee a consumer would pay to a fee-only 

advisor. Second, the maximum surrender charge structure of seven years would 

limit the amount of trail commission that could be paid to a reasonable rate.
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In our humble opinion, the product described above should be part of every 

American’s retirement savings portfolio. This product is unique among the entire 

spectrum of retirement savings vehicles in addressing the Department’s policy goals 

in a complete and comprehensive manner. A streamlined exemption facilitating the 

ease of sale is entirely appropriate.

CONCLUSION

Unlike security products such as mutual funds, stocks and bonds, or variable 

annuities where the consumer can lose money, with a fixed annuity – including of 

course fixed indexed annuities – there is no downside risk for the client’s principal

and credited interest – even when the market goes down. Security products simply 

do not have the guarantees that fixed annuities have.

Indeed, fixed annuities are unique among all investment and financial planning 

vehicles in that they offer a combination of benefits and guarantees to help 

consumers achieve their long-term retirement goals. The two most critical 

guarantees in this regard are the guaranty that the annuity will accrue at least the 

minimum interest rate credited to the contract during the accumulation phase and 

that there is a guaranteed minimum income payout during the distribution phase. 

With fixed annuities, the client knows exactly what their account is worth – every 

day, week, and month. They know what the minimum account value will be one 

year from now, three years from now, ten years from now: those values are 

guaranteed under the contract from the insurance company. And with fixed indexed 

annuities (unlike all securities products), the investment risk is shifted to the 

insurance company. 

The features and benefits of fixed annuities make them unlike any other retirement 

planning product. NAFA believes that fixed annuities are the best products to safely 

fund or augment most Americans’ retirement needs. The insurance-backed 

guarantees, the fact that there is no risk to the client’s principal, and the guaranteed 

income options are very good solutions to today’s retirement crisis.

For these reasons, the Department’s inclusion of all non-security fixed annuity 

products under PTE 84-24 was correct in the proposed rule and should remain that 

way under the final rule.
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Again, on behalf of NAFA and its members, I want to thank you for the opportunity 

to submit these additional comments. Please do not hesitate to contact me if you 

would like additional information or if you have any questions.

Sincerely,

Charles “Chip” Anderson

NAFA Executive Director