The Arkansas Insurance Department held a public hearing this week on its proposal to adopt a “best interest” standard for agents recommending and selling annuities. It’s one of six states in the midst of considering similar changes based on recommendations developed and passed by the National Association of Insurance Commissioners (NAIC) earlier this year.
The revisions the NAIC made to its annuity suitability model regulation was designed to give states a model to follow to align their annuities standards with the SEC’s Regulation Best Interest; the NAIC revision read that “all recommendations by agents and insurers must be in the best interest” of clients. Like the SEC rule, the revisions the NAIC made demanded that agents and insurers meet obligations of care, disclosure, conflict of interest and documentation (called compliance in Reg BI).
In addition to Arkansas, proposals are pending in Rhode Island, Michigan, Nevada, Kentucky and Ohio, with the public comment period in the Buckeye State closing Friday. Additionally, Arizona and Iowa already adopted their own adaptations of the model rule earlier this year, though they have not yet gone into effect.
The full process from introduction to implementing a new rule can take several months, according to Jason Berkowitz, the chief legal and regulatory affairs officer at the Insured Retirement Institute (IRI), which advocates for the retirement income industry and has submitted comment letters in support of the states' proposed best interest rules. He said the IRI would have expected to have seen more states adopting rules based on the NAIC’s revisions, but the COVID-19 pandemic has stretched regulators’ bandwidth and slowed progress.
“We’re starting to see some states focusing on this, as they’ve gotten their arms more fully around what they need to do to help consumers in regard to the pandemic,” he said. “We’re pleased with the pace of activity, and I expect we’ll see an uptick of (rules) in the next 6 to 12 months, contingent on how things go with the pandemic.”
The IRI was not the only supporter of the state amendments; during the public comment period for Iowa’s rule, other organizations, including the American Council of Life Insurers (ACLI) and the Financial Services Institute (FSI), submitted comment letters urging the state’s insurance division to adopt the amendments, and in some cases urging the state's regulators to move the standard even closer to Reg BI's.
“Currently, the industry remains necessarily focused on both Reg BI implementation and managing business as usual through the national emergency,” FSI’s letter read. “To the extent the rule aligns with Reg BI, this allows firms to continue to focus on Reg BI compliance while also working to comply with the Iowa regulation.”
However, the Securities Industry and Financial Markets Association (SIFMA) argued that Iowa’s regulation change is unnecessary, as Reg BI would apply to the conduct of all federally registered broker/dealers.
“Given the pandemic-related business continuity efforts underway and emerging at this time, we would highly recommend suspending action on the proposal, as there is no compelling need for Iowa to amend its state regulations,” the letter read. “By operation of the SEC rule, Iowa residents will receive the manifold protections of that rule, including enforcement by the SEC and FINRA.”
Criticism of the NAIC rule mirrors the criticism of the SEC’s rule, including that it fails to adequately define what “best interest” means for those who are being regulated. Neither FINRA’s nor the NAIC’s interpretation of Reg BI makes it any clearer, according to Michelle Richter, principal of Fiduciary Insurance Services.
She argued it is particularly problematic for the insurance industry because while both sales and investment advice co-exist in the securities space, there is no corollary for advice with insurance agents. Additionally, if an insurance agent decides to forgo FINRA licensing to sell indexed annuities, oversight would be limited.
“Because that’s the case, my industry becomes the dumping ground for those who intend bad conduct on innocent consumers, which is not to say most insurance agents behave that way,” she said. “It’s just the case that if the rest of the financial services community has a robust system in place for evaluating the conduct of representatives, it begs the question as to where those others will go.”
But Berkowitz said he believed the best interest definition was adequately spelled out in the obligations advisors (in Reg BI) and agents/issuers (in the NAIC rule) have to consumers. He argued that critics want to judge whether a best interest standard was met on the basis of investor or purchaser outcomes, rather than the business process.
Outcomes could be influenced by a variety of factors, he argues, and aren't always determined by the advice offered. He also pointed to the “safe harbor” provision as an essential part of the model rule for producers who may be subject to both Reg BI and state rules.
“It’s unnecessarily and potentially confusing for someone to comply with both regulatory regimes,” he said. “If you’re complying with Reg BI, we’ll deem you to be in compliance with this model. It’s a recognition that the objective and design are trying to achieve the same outcomes.”
New York, the only dissenting voice when the NAIC voted on its model revisions, has adopted its own, more stringent best interest standard on agents licensed to sell annuities and life insurance products, stating that “only the interests of the consumer shall be considered in making the recommendation.”
Richter believed that other states such as Massachusetts and New Jersey as well would be unlikely to move forward with the NAIC model.
“It’s reasonable to think over time there will be some more states that communicate concerns,” she said. “But more likely than not, the states that felt the biggest concern have already voiced that."