A Best-Interest World: Regulation Steams Ahead Despite Pandemic

While the COVID-19 pandemic is getting most of the attention these days, work to transform the sales regulations governing insurance products marches on uninterrupted.

The American Council of Life Insurers hosted a session Monday to remind members that the Securities and Exchange Commission, the National Association of Insurance Commissioners and the federal Department of Labor have not paused one bit in their respective efforts to establish best-interest rules.

Those efforts are supported, for the most part, by an industry that wants a harmonized regulatory framework above all else. "Best interest" is viewed by many as a compromise point between suitability rules that have long governed insurance sales and the tougher fiduciary standard in the advisory world.

Chin Kim, assistant vice president of RSD compliance for Pacific Life, provided an update during Monday's opening day of the ACLI Annual Conference:

SEC Regulation Best Interest. The SEC rule took effect June 30 and, so far, with little fanfare or disruption to the brokerage industry.

Reg BI requires that four factors be considered in developing a recommendation for a retail customer: the customer’s investment profile, potential risks and rewards, and costs. It also includes a new "customer relationship summary" disclosure between broker and customer.

One reason the rule has not caused much disruption is the SEC's commitment to a soft rollout. The agency said it is merely looking for brokers and firms to make an initial "good faith effort" to comply. Reg BI is a principles-based rule, as opposed to being prescriptive, Kim noted.

"It's good as in terms of allowing the business or the firm to kind of figure out what works best for them, as long as they follow within the guideline and spirit of the rules," he said.

The DOL investment advice rule. This rule would replace the controversial fiduciary rule published by the Obama administration. The Trump replacement has two main parts: a new exemption allowing advisors to provide conflicted advice for commissions; and a reinstatement of the "five-part test" from 1975 to determine what constitutes investment advice.

Comments were collected, with opponents from both sides unhappy with the effort, in August and a public hearing held. Now the industry waits for the DOL to either withdraw or publish a final rule.

Publishing a final rule could happen within a couple weeks, or 30-45 days at the longest, Kim estimated. The DOL might want to have a rule on the books in case President Donald Trump loses the Nov. 3 election, others have speculated.

The NAIC best-interest model law. The NAIC revisions to the suitability in annuity transactions model law were adopted in February. Since then, Arizona and Iowa have adopted the rules, which establish a best-interest standard that aligns with rules being considered by other agencies.

Industry representatives predicted swift adoption of the rule in many states and promised aggressive lobbying to nudge others to pass the rules. So far, that hasn't happened.

But several other states have started efforts to adopt the new model, Kim said, listing Michigan, Idaho, Rhode Island, Ohio and Kentucky among them. Meanwhile, the NAIC produced a series of frequently asked questions that it hopes to have out to states soon, in the hopes it motivates a wider adoption of the model in 2021.

"Through the collective efforts of insurance regulators, they're trying to help the producers move from the current suitability standard to best interest," Kim said.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.

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