Sunday, June 16, could have been thought of as Harkin Day, at least among indexed annuity professionals.
This was the effective date of suitability “tests,” or conditions, to use in determining whether certain fixed products, especially indexed annuities, will be exempt from federal securities regulation. (There are other conditions as well, but the focus here is on the tests.)
The tests appear in the so-called Harkin Amendment, the section of the Dodd-Frank financial reform act that is widely credited with affirming the state regulation of fixed insurance and annuity products.
Now that the effective date has passed, industry experts and practitioners are trying to puzzle out what this may mean for the sale and regulation of annuities. Are the policies now being sold subject to those tests?
The short answer is yes. But that answer is not complete. A requirement in one of those tests makes for some uncertainty about how this regulatory future will play out.
This requirement says that, to qualify for the Harkin safe harbor, starting June 16, policies need to be issued in states that have adopted the Suitability in Annuity Transactions Model regulation of 2010 published by National Association of Insurance Commissioners (NAIC).
Common industry understanding is that all 50 states must adopt this model by June 16. The problem is, the law does not specifically say that although many assume it’s intended. Also, only 31 or 32 states and the District of Columbia have adopted the model or something close to it, so some industry practitioners are wondering if the 15-plus shortfall in state adoptions will void Harkin.
To unpack the mystery, it helps to review the relevant provisions.
According to Stephen E. Roth, partner at the Washington, D.C., law firm of Sutherland Asbill & Brennan, one of the Harkin stipulations for exemption from securities regulation is that fixed annuity products must meet one of two suitability requirements starting June 16, 2013. Roth calls these requirements “tests.”
The adoption test says that the product must be issued in a state, or issued by an insurance company domiciled in a state, that has adopted suitability rules that “substantially meet or exceed” the minimum requirements in the 2010 NAIC suitability mode.
The nationwide compliance test says the product must be issued by an insurance company that “adopts and implements,” on a nationwide basis, practices that meet or exceed the minimum requirements of NAIC 2010.
All 50 states?
“It is widely understood that Congress intended for all 50 states to have adopted NAIC’s 2010 suitability model,” Roth said.
The law was enacted three years ago, he explained, and only a handful of states had adopted those regulations at that time. “The Harkin language doesn’t say that all 50 states must adopt the 2010 version by June 16, 2013, but the sponsors of the legislation (likely) assumed that would have happened by now.”
Since two-thirds of states have adopted the model but one-third has not, this does make for some confusion, he conceded.
However, Roth said the provisions are written in such a way that the carriers and distributors that want to continue selling annuities under Harkin can still do so. That is because the two tests are meant to complement each other, he said.
For example, carriers that are domiciled in states that have not yet adopted the model can still sell products under Harkin in states that have adopted the model, he said. “Or they can rely on the second test—namely, that they adopt and implement, on a nationwide basis, practices that meet or exceed the minimum requirements of the 2010 model.”
Roth does see a possible problem emerging if a carrier decides to go in another direction. That is, a carrier might decide to start selling in states that have not yet adopted the 2010 suitability model, but use, in those states, “loosened” suitability practices. By loosened practices, he means suitability standards that do not meet or exceed the minimum requirements of NAIC 2010.
“The best practice is to comply with the standards of the NAIC model in states that have not yet adopted the model,” he said, adding that “it would be a mistake to ignore the enhanced suitability elements of that model if the company is trying to comply with the letter and the spirit of the law.”
Some thoughts for agents
Agents and advisors should look to their carriers for compliance after June 16 as they did before June 16, Roth said.
He doesn’t believe much will change for producers. “I am assuming that the procedures the carriers put in place before June 16 will remain in place.”
However, if a producer gets word, after June 16, that the suitability standards where he or she sells have now become less rigorous, “the producer should ask questions as to why. I hasten to add that I can’t imagine agents will see anything of the sort occur.”
John L Olsen, president of Olsen Financial Group, St. Louis, said that the June 16 deadline means that if a fixed insurance product or annuity product is sold after that date in a state that has not adopted the NAIC suitability model, and if the insurer has not adopted the model’s suitability guidelines, “that sale will not be eligible to claim the safe harbor of the Securities Act.”
If that is the case, he said, it probably means that the Securities and Exchange Commission (SEC) would have jurisdiction of that sale. “If the SEC doesn’t do anything about it, it will be much ado about nothing. But I just don’t know.”
It could work out that state securities departments might step into the picture, Olson observed. For instance, he said, if a state has not yet adopted the 2010 NAIC suitability model, that state’s securities department “might be incented to assert jurisdiction over insurance and annuity sales.”
The securities departments might do this on the theory that, if the product is no longer eligible for the "exempt securities" safe harbor of Sect. 3(a)(8) of the 1933 Securities Act, then it's a "security," he explained.
“Of course, some state securities departments are already asserting jurisdiction over index annuities.”
At press time, Florida became the latest state to have adopted NAIC 2010 suitability model whenGov. Rick Scott signed SB 166 into law on June 14. Fourteen days earlier, on June 1, Minnesota Gov. Mark Dayton let the legislature’s own version of the NAIC model become law—without a signature or a veto.
The Harkin Amendment is in Section 989J (in Subtitle I of Title IX)of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).
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