In subjecting FIAs and VAs to the BIC exemption, the DOL singled out the products for their “risks and complexities,” according to language in the finalized fiduciary rule.

Just prior to the rule’s release, analysts at Fitch Ratings said the “onerous requirements” of the BIC exemption will negatively impact annuity sales for insurers.

And on the day the rule was released, Standard and Poor’s Ratings Services also issued a warning for providers of fixed indexed and variable annuities, which combined accounted for $190 billion in sales last year.

“We believe this  (rule) could meaningfully affect sales of VAs and FIAs in the near term,” wrote S&P analysts in an investor brief. “If companies are unable to adapt quickly and their relative market positions deteriorate, we could view their overall competitive position negatively.” Neither agency is ready to downgrade insurers as a result of the rule–yet.

The ability to adapt is likely to hinge on how insurers will price annuities going forward.

Language in the final rule regarding commission-based sales on all investments is much more forgiving than what was first laid out in the proposed rule. But as fiduciaries under the BIC exemption, providers and advisors will be required to charge “no more than reasonable compensation” on products, according to the rule.

Factoring exactly what constitutes reasonable compensation on FIAs and VAs is hardly clear-cut, says John Sarich.

“The challenge is how do you determine best interest,” said Sarich, vice president of corporate strategy for Vue Software, a Boca Raton, Florida-based provider of compliance and management platforms to insurers and advisors.  “Is it price, is it product? There is still a lot of grey area.”

Sarich has spent his career delivering tools to help annuity providers stay compliant with what he says is a “labyrinth” of state and federal regulation governing annuities.

From his perspective, the DOL still has work to do specifying the reasonable compensation requirement for insurers and the advisors recommending annuities in the future.

“The fear in the industry is that there will be a bias for fee-based compensation,” said Sarich, who describes himself as agnostic on the DOL’s rule, but acknowledged the new regulations will create opportunity for his firm and others that design distribution platforms for annuities.

“Fee-based sounds cleaner, but it opens up a lot of questions,” he added.

One question is how to price the level of service and advice that will be required after a sale is made, said Sarich. “These products can be uniquely complex.”

That puts him in agreement with the DOL. Annuities create multiple levels of compensation by the time a product is sold, explained Sarich. How those layers are disclosed will change with this rule, he said, but determining exactly how will be hard to do without more input from regulators.

“As is, some fees and commissions are disclosed, and some are not. Between advisors, managers, distributors—there are a lot of fingers in the pie. Insurers will need more specifics.”

In the final rule, the DOL defers to the Employee Retirement Income Security Act’s treatment of reasonable compensation for questions on compensation on FIAs and VAs.

Section 408(b) (2) of ERISA, which was finalized in 2012—after more than four years of rulemaking–addressed reasonable compensation by creating extensive new disclosure requirements for covered service providers to ERISA-governed retirement plans.

Direct compensation, indirect compensation, and incentive compensation all must be clearly defined under 408(b)(2), along with termination fees and thorough descriptions of the services delivered.

In its final rule, the DOL noted that “several factors” determine reasonable compensation, including market pricing of services and assets, the cost and scope of monitoring, and the complexity of the products, according to the rule.

But in deferring questions of reasonable compensation for annuities to ERISA, the DOL may have raised more questions than answers, thinks Sarich.

“We don’t know everything we need to create add-ons to existing compliance tools,” said Sarich, who said his firm is fielding inquiries for insurers and advisors on a daily basis.

Language in the final rule suggests the DOL may be aware of that. After referring interested parties to how ERISA defines reasonable compensation, the rule says “the Department will provide additional guidance if necessary.”

For Sarich, the need for that guidance is not a question of “if.”

“Now all the DOL has to do is issue the final rules to its final rule,” he said.