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Suitability, Best Interest, Fiduciary…Oh my!

April 29, 2019

The seemingly endless debate over “standard of care” regulations for annuity sales will come to a head this fall when the Securities and Exchange Commission is expected to issue its proposed “Best Interest” standard and the NAIC is likely to follow with publication of revised “Model Act” language. In the interim, individual states may enact their own laws and regulations governing annuity (and in some cases life insurance) sales that could go much further than either the SEC or the NAIC intends, and could possibly exceed the fiduciary standard that was proposed by the Department of Labor several years and ago.

You remember the DOL fiduciary standard, right? From 2014-16 the DOL rule was on the agenda of virtually every insurance company and agent conference – including those of the Alliance – as the industry geared up to comply with what seemed like the inevitable enactment of the fiduciary standard. However, in March 2018, the Fifth Circuit Court of Appeals struck down the DOL fiduciary rule and essentially brought the debate back to square one.

Shortly thereafter, the Securities and Exchange Commission picked up the baton and proposed a “Best Interest” rule. The one major problem with the SEC proposal is that it failed to define the term “Best Interest” and, moreover, explicitly stated that it was not proposing any definition. So while we know that “Best Interest” is something less than a fiduciary standard, the definition is less than clear which opens the door to potential legal action against producers and insurers. To learn more about the SEC “Best Interest” proposal, check out this PPT presentation that was delivered to the NAIC Life Insurance Committee at this month’s NAIC meeting in Orlando.

The NAIC seems determined to develop a more definitive definition of “Best Interest” as part of its Model Act, which will likely be unveiled later this year. State regulators have been working on this issue for months and responsibility for a revised draft of the regulation has been placed into the very capable hands of Ohio Insurance Commissioner Jillian Froment, who chairs the NAIC’s Annuity Suitability Working Group. In a presentation to fraternal executives and board members gathered at the Alliance’s regional meeting in Cleveland last week, Commissioner Froment shared her insights into regulators’ efforts to develop a Model Act that protects consumers from unscrupulous producers and companies yet preserves a competitive marketplace for annuity consumers of all incomes. She felt confident that “there is a way forward” and said that regulators were taking input from all interested parties in order to reach a solution that “may not make everyone happy but won’t make one group miserable.”

In the interim, some states – most recently New Jersey – are moving forward on their own and attempting to enact regulatory standards that go far beyond either suitability or best interest thresholds. This sets up a “worst possible scenario” potential where insurers and producers would have to comply with a crazy quilt pattern of regulatory standards that vary widely from state to state.

And that’s what’s at stake here. A standard that is too difficult to understand and comply with opens up insurers to the lawsuit lottery. A standard that is not consistent across the states makes it all but impossible for only the largest insurers to comply with because they have the resources to retain the talent necessary to ensure compliance. This could result in the accessibility of annuities to secure a steady stream of retirement income being severely curtailed for people of modest means as producers and smaller insurers simply won’t be able to afford the compliance costs for lower value products. The “plain vanilla” fixed annuities that most fraternals provide their members are an excellent fit for many of these consumers, who, in addition to purchasing a financial services product, also receive value from membership in a society that supports projects, programs, and causes that reflect their values.

The annuity suitability issue is not fraternal-specific in that it does not target fraternals directly. But it does impact fraternals and their members in a very big way. So while the Alliance does not have an official policy position on the issue, we are working very closely with our industry colleagues like ACLI, NAIFA, NAFA, IRI and others to make sure whatever standard is developed is a) fair to all consumers and competitors, and b) is understandable and can be complied with.

The Alliance will do its best to keep you informed of developments on this issue every step of the way. In addition to these posts, look to “Weekly Headlines” for the latest news on NAIC, SEC, and individual state action on this issue. And watch for legislative and regulatory bulletins on enacted statutes and rules. Of course, you can always email for the latest information at jannotti@fraternalalliance.org. Stay tuned, this debate is far from over.

 Joe Annotti with Jill Froment

Joe Annotti with Jillian Froment, Director of the Ohio Department of Insurance, at last week's Alliance Meet & Eat in Cleveland.