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Insurance Commissioners Are Crafting Their Own Best Interest Standard

By Rita Raagas De Ramos February 12, 2018

The National Association of Insurance Commissioners has produced its own proposal for a best interest standard for annuities, while uncertainty remains over the final content of the Department of Labor’s fiduciary rule and whether the SEC will come up with a rule with a wider reach in terms of the types of advisors and products addressed.

The comment period for the NAIC’s proposal ended January 22, and law firm Eversheds Sutherland expects the association to produce a revised draft after reviewing around 20 comments received from various parties, including the American Council of Life Insurers and the Consumer Federation of America.

Lawyers, trade groups and consumer advocates have reasoned that having a comprehensive fiduciary rule for all types of advisors and all types of products is a challenge because of their various governing bodies.

In terms of oversight, the DOL’s Erisa standard is for qualified retirement accounts. Finra -- which answers to the SEC -- self-regulates its broker-dealer member firms, while the SEC relies on securities laws to watch over registered investment advisors.

In terms of products, securities and variable annuities are regulated by the SEC, whereas fixed annuities are regulated by state insurance commissioners through the NAIC.

Until the DOL rule is fully implemented on July 1, 2019 -- barring any changes to that date following an ongoing review -- retirement advisors are working on compliance requirements for the transition period. The expansion of the fiduciary standard requirement to broker-dealers and insurance agents serving retirement accounts is already in effect, but the Best Interest Contract Exemption requirement is on hold.

During the transition period, retirement advisors who expect to make use of the BICE are required to comply only with so-called Impartial Conduct Standards, which state that BICE users must "adhere to basic fiduciary norms and standards of fair dealing." Specifically, advisors must charge no more than reasonable compensation, avoid making materially misleading statements, and provide advice that is in the investor’s best interest.

The NAIC has proposed revising its own suitability standards to include best interest standards. The working proposal is currently called "Suitability and Best Interest Standard of Conduct in Annuity Transactions Model Regulation." The proposal applies to "any solicitation, negotiation or sale" of annuities.

The proposal says compliance with the best interest standard means that at the time an annuity is issued, "reasonable diligence, care, skill and prudence" are exercised "in a manner that puts the interest of the consumer first and foremost."

The proposal spells out what the NAIC believes best interest does not mean. First, it says a recommendation need not be the least expensive annuity product, or the annuity product with the highest stated interest rate or income payout rate at the time of the transaction. Second, it says the recommendation need not be the single "best" annuity product available in the marketplace at the time of the transaction, noting that it is enough that the insurance agent believes he or she acted with reasonable diligence, care, skill and prudence and believes the recommendation is in the best interest of the consumer.

The proposal also touches on compensation, saying that the insurance agent "must receive no more than reasonable cash compensation" when making a recommendation, further defining reasonable to reflect the time invested in and the complexity of the advice.

In its comment letter, the CFA is urging the NAIC to withdraw and "extensively revise" its proposal "to address its shortcomings." The consumer advocate group says the proposal offers only limited improvements over existing regulations governing annuities transactions and doesn’t adequately protect consumers from the harmful impact of conflicts of interest.

In a legal alert, Eversheds Sutherland says the sections about compensation "are clearly taken from the impartial conduct standards included in the DOL exemptions, and do not appear to have a historical basis in insurance regulation." Thus, the law firm believes the proposal "is likely to be viewed as introducing new standards into the insurance industry for producer compensation."

CFA says the NAIC proposal is "weaker" than the DOL rule because it "does nothing to rein in conflicts of interest" and "it cannot provide the basis for a uniform standard" across retirement and non-retirement accounts.

Barbara Roper

"It has become increasingly common over the past few decades for insurance producers, like broker-dealers, to recast themselves as financial advisors or retirement planners in order to attract clients seeking objective, professional advice about their retirement and other investments," the CFA says. "Doing so involves downplaying the sales-driven nature of the relationship and characterizing it instead as one of trust and reliance in which the interests of the customer always come first."

FA-IQ reached out to the NAIC for this article, but the association said it can only comment through the committee process involved in the proposal.

Meanwhile, the ACLI welcomes the NAIC proposal for a best interest standard, while adding that it expects the proposal to evolve as "NAIC coordinates its work with federal agencies." The trade group believes consumers will benefit from a "harmonized" best interest standard for annuities, which "can be achieved only through a coordinated effort" among state insurance regulators, the SEC, Finra and the DOL.

The ACLI expressed some concerns, however. It believes the proposal should stick to a best interest standard but eliminate the suitability standard. It believes the best interest standard should only be applied to recommendations, not negotiations, and that recommendations should be based on a customer’s insurance needs and financial objectives. It also wants to include that the mere receipt of any cash or compensation related to a recommendation as well as the recommendation of a proprietary or limited range of products are not inconsistent with best interest requirements.

Barbara Roper, director of investor protection at the CFA, tells FA-IQ that the ACLI’s suggested changes would "weaken an already weak standard." She says the ACLI only supports a harmonized standard "in the sense that they support a race to the bottom, where all types of accounts are subject to a best interest standard in name only and industry practices that encourage and reward advice that is not in customers’ best interest continue unabated."

She notes that the ACLI wants to further restrict the scope of the NAIC’s proposed best interest standard, which -- as it stands -- "generally" only applies to the point of sale. She adds that the ACLI also wants to "hammer home the notion" that there is "no continuing duty of care after the transaction."

FA-IQ reached out to ACLI for this article but did not get a reply as of this writing.