The bigger your IMO, the bigger your compliance risk
February 23, 2010 by Dennis M. Groner
Published 2/2/2010
For years, entrepreneurial agents have been building successful general agencies. However, over the last couple decades, many have moved beyond merely being a big general agency to become independent marketing organizations (IMOs) that are multi-state operations with hundreds of active agents and contractual relationships with multi-product producers.
As IMOs have grown in size, many have discovered that their compliance risks have also grown. In the past, regulators and plaintiffs turned to the insurance company who manufactured the product and appointed the agent for resolution of any compliance issue arising from the sale of its products.
However, insurance companies have been changing their contract language over the last decade to shift more responsibility to IMOs for training, supervision and monitoring of their agents, which includes compliance and market conduct. In many instances, the insurance company that produced the product has turned to its contract with the IMO to defend against responsibility for any improprieties. Regulators and plaintiffs have typically seen the insurance company as the “deep pockets” that should bear responsibility for sanctions and damages. However, the greater the size of the IMO, the more likely it too, will be seen as having “deep enough pockets” to make it worthwhile to involve it in sanctions and litigation.
If the IMO is involved in serious compliance and market conduct improprieties, it can suffer significant reputational risk in the marketplace. Reputational risk can surface quickly in any Internet search of the name of the organization and its officers, once a regulator has taken action or a suit has been filed. Often an IMO retains the name of the founder or president (e.g., The Smith Agency), and regulator and legal actions against the agency will reflect directly on the name of the founder or its management. The ability of an IMO to attract agents can be severely hurt by a single impropriety.
An IMO needs to consider compliance and market conduct risk as part of its overall development plan. As the IMO grows, its need for compliance and market conduct support and controls also grows and changes. Investing in compliance and market conduct controls is most cost-effective when done on a staged basis.
The majority of IMOs are not broker-dealers. Typically, their producers maintain their registration with a broker-dealer who has responsibility for supervising their activity as a registered representative. Those IMOs that are broker-dealers have much greater compliance responsibilities and they may be unable to delay development of many of the control procedures listed in this article. The compliance controls needed for an IMO which is a broker-dealer are not the subject of this article.
The following are some of the ways that an IMO which is not a broker-dealer can mitigate or control compliance and market conduct risk early in its growth.
Selection of producers
Selection procedures and standards reduce compliance risk by avoiding contracting producers with a history of questionable compliance behavior. Early hiring decisions can often create compliance problems because of the pressure to hire agents quickly to make the IMO a viable operation. These early compliance problems can torpedo the IMO before it really begins to grow and develop.
Development of selection procedures and standards should be accomplished prior to launch of the IMO. Often, the IMO will forgo background checking and rely on the appointing insurance company to conduct a check. However, to maintain its reputation with insurance companies, the IMO should avoid submitting for appointment any producers who will be rejected. This requires that the IMO carefully screen prospective producers for compliance and market conduct issues in their background.
Some insurance companies have low selection standards which can come back to haunt the IMO. Therefore, it should not totally rely on the insurance company’s willingness to appoint the agent as a clear sign that there are no compliance issues in the agent’s background that could signal future trouble. The IMO needs to have an interview process that focuses on potential compliance and market conduct issues as a function of the agent’s market, sales approach, experience, education and training.
Contractual obligations related to compliance
An IMO’s contracts with its producers should include compliance obligations which will reduce compliance risk for the IMO. Should compliance problems arise, the IMO can demonstrate that it had directed the producer to avoid improper sales practices as part of their contract and that the producer had acknowledged the IMO’s compliance policies and procedures.
Code of conduct
A well-written code of conduct reduces compliance and market conduct risk by alerting producers to general IMO compliance policies and procedures during the hiring process and educating them about the IMO’s general policies and procedures. A code of conduct should be developed prior to launch of the IMO and referenced in the producer’s contract. The signing of the contract acknowledges receipt, acceptance and understanding of the code.
As the IMO grows and prospers, it needs to continue to build its compliance and market conduct controls. Since IMOs grow at different rates, it is difficult to specify when the IMO should consider investing in additional controls.
Compliance policies and procedures
An IMO compliance manual which contains the IMO’s compliance policies and procedures reduces risk by providing producers and management with documented, standardized guidelines. An IMO compliance manual demonstrates to regulators that the IMO had documented policies and procedures in place should a producer create a problem. In litigation, a compliance manual strengthens the defense that the producer’s improper behavior was a violation of IMO policy and procedure, and therefore, the IMO is not liable for the producer’s actions.
IMOs should not rely on the compliance policies and procedures of the insurance companies whose products they sell, because there is a lack of consistency among insurance companies’ compliance policies and procedures. Though the IMO should not use an insurance company’s policy and procedure manual as its own, it should compile all of the compliance manuals from the insurance companies whose products it will be distributing, obtain electronic versions and develop a compliance database for its use. Producers should have easy access to the compliance policies and procedures of the IMO’s preferred distributors. The IMO’s service staff should also have easy access to this information.
A rough rule of thumb for when an IMO needs to begin developing its own compliance and market conduct policies and procedures is when it has more than 50 producers.
Compliance education and training
Providing producers with education and training reduces risk by creating awareness of compliance issues and educating producers about how to avoid problems. Producers should also be given updates on changes to regulations that impact them.
Compliance risk is further reduced by demonstrating to regulators that the IMO has an active compliance education process. An ongoing education and training process is useful in litigation because it demonstrates that the IMO had carried out a key element of its responsibility to supervise its producers.
The only training required by regulation (other than continuing education training requirements) is anti-money laundering (AML) training. The IMO should either obtain a copy of the certification of completion of AML training from every producer on an annual basis, or use a vendor’s training program. It is not cost-effective for the majority of IMOs to develop a customized AML training program.
AML monitoring and training procedures are needed at IMO launch, but general compliance education and training can wait until the organization has grown in size to the point where there are so many producers that at least two supervisors are required to carry out normal supervisory duties.
Many IMOs monitor producers’ continuing education fulfillment and remind producers 90, 60 and 30 days prior to license expiration of their continuing education requirements. It typically is not cost-effective for the IMO to assume responsibility for providing continuing education support beyond reminding producers. Product providers often provide continuing education support through programs provided by the regional staffs. This may be a service that the IMO can coordinate for producers. Some IMOs provide producers with information about vendors that can provide continuing education training.
Compliance communication
Product providers should provide the IMO with updates on changes to their policies and procedures and updates on changes to state, SRO and federal regulations. The IMO should post this information on a timely basis on its Web site for its agents and administrative staff after editing and synthesizing to reduce redundancy. An IMO must be vigilant that it is up-to-date on changes to regulations. Important changes should be communicated to producers and administrative staff and in some cases, the IMO should require that the producer and staff member formally acknowledge receipt of the information.
As part of the IMO’s ongoing compliance communication efforts, it should develop a compliance section on its Web site that lists all compliance-related, education and training information. This reduces compliance risk by creating awareness among producers and staff about any changes in policy. It also demonstrates to regulators that the IMO was vigilant in informing its producers about changes in regulations.
It is best that changes to regulations be included on the IMO’s Web site at launch. Using the Web site to communicate information about compliance and market conduct training and education can typically wait until the IMO has grown to point where it is cost-effective to provide its own education and training.
Supervisory policies and procedures
Documented supervisory policies and procedures (e.g., a supervisor’s manual) reduce compliance risk by providing supervisors with guidelines. A supervisor’s manual demonstrates to regulators that the company actively supervised compliance and market conduct.
In litigation, it strengthens the ability to defend against accusations that the IMO failed to supervise its producers. IMO supervisory policies and procedures should include review of advertising and sales materials, monitoring of critical compliance related indicators, disciplinary procedures, etc.
At launch, the IMO should include compliance responsibilities in the job descriptions of its management. As the organization grows in size, it often formally assigns responsibility for compliance to an appropriate member of management. As the IMO further grows, it often will designate a staff person to be its Compliance Officer. This individual should be suitably trained and have authority to carry out his or her compliance responsibilities.
An IMO supervisor’s manual need not be implemented at the IMO’s launch. Typically, it is not necessary to create a supervisor’s manual until there are least two producer supervisors.
It is important to note that once compliance-related policies and procedures are implemented, the IMO must follow them. The implementation of policies and procedures which are not followed increases compliance risk, since failure to follow documented policies and procedures demonstrates a conscious disregard for them.
Dennis (Denny) Groner, Ph.D., CLU, ChFC, is a consultant to U.S. and international financial services companies on compliance and market conduct. He has worked with IMOs on developing compliance controls. Mr. Groner has written a number of books and articles on the compliance and market conduct. He can be reached at DenGroner@aol.com.
