What if all 50 states do not adopt the new annuity suitability regulations developed by National Association of Insurance Commissioners by June 16, 2013 -- and what insurance agents need to know about this?
The question arises because the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank ) has set June 16, 2013, as the deadline for state adoption of those requirements.
More than 15 states have already adopted the model or they have comparable regulations in place, and more plan to follow suit this year. But some industry people are not clear on what happens if all states do not adopt the model, as sometimes happens with NAIC models.
Stephen E. Roth, partner at the Washington, D.C., law firm of Sutherland Asbill & Brennan LLP, answers by pointing to the section of Dodd-Frank that includes the deadline. This is the so-called Harkin Amendment, or Section 989J of Dodd-Frank (in Subtitle I of Title IX).
This amendment lays out new safe harbor for annuities and life products, stipulating how they can be exempted from securities regulation, he says.
One of the stipulations for exemption is that the product must meet one of two 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 NAIC Annuity Transactions Model Regulations of 2010 (NAIC 2010).
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.
(Note: Harkin includes two other requirements to qualify for the safe harbor, as well, but these do not have deadlines. One is that the product’s value does not vary according to the performance of a separate account. The other essentially requires the product to satisfy standard nonforfeiture laws or model requirements.)
So what will happen?
Between now and June 2013, it doesn’t matter how many states adopt the NAIC 2010 model, says Roth. Companies and their agents are still operating under existing laws regarding exemption from securities laws. This includes Rule 151, the safe harbor for excess interest annuities.
But starting June 16, 2013, whether and to what extend the states have adopted NAIC 2010 will come into play, says Roth. There will be three possibilities for selling Harkin products.
1) Meet the adoption test. Carriers whose states of domicile meet this test will be able to sell their fixed products, exempt of securities laws, on a nationwide basis under the Harkin safe harbor, Roth says.
2) Meet the nationwide compliance test. This can work for companies whose state of domicile has not adopted NAIC 2010 or something comparable, Roth says, but the carrier must be sure to have nationwide policies and procedures in place that meet or exceed the NAIC 2010 model. (Such carriers would be subject to state-level examinations to monitor compliance.)
3) Limit sales to states that have adopted NAIC 2010. “Carriers could do this in theory, but I don’t think many would do that,” says Roth.
Heads up for agents
Agents should know that, if a product is not in a safe harbor, “that doesn’t mean the carrier is doing anything wrong,” Roth stresses.
Harkin did not replace or override Section 3(a)(8) of the Securities Act of 1933 (the 1933 Act) and the long-standing “reasoned analysis” related to that section, to the effect that fixed insurance and annuity products are not securities, he explains.
Rather, Harkin expands the exemption for insurance products, and it provides more design flexibility for products that will not be registered as securities, he says.
Still, out of prudence, agents who do not want to sell an unregistered security, might want to ask a few questions about new products they are being asked to sell, Roth says.
“For instance, an agent who is representing a carrier that is not domiciled in a state that has adopted NAIC 2010 might consider asking about how the company concluded that the new product is not a security. So might an agent who is representing a company that has not asked the agent to follow the NAIC 2010 model.”
Roth says the carrier’s response, in such instances, might be that “this is a pre-Harkin product,” and/or “it’s based on reasoned analysis of Section 3(a)(8), the same as always.”
Products developed with the Harkin Amendment in mind are being called Harkin products, Roth notes. In recent months, carriers have started showing interest in developing such products, he says.
What may surprise some industry professionals is that the Harkin Amendment does not apply only to annuity products. Many index annuity agents and distributors have referred to it as a Dodd-Frank provision that exempts indexed annuities from regulation as securities, Roth notes. However, the Harkin language takes a broader focus, saying it applies to “sale of any insurance or endowment policy or annuity contract or optional annuity contract.”
Because of that, it is conceivable that Harkin products could comprise a range of fixed life and annuity policies. Right now, legal and product experts are still studying some aspects of the provision and what they may mean in terms of design.
Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].
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