After three years of realigning federal regulation to be more business-friendly, prepare for whiplash if the presidency and Senate change hands in this election.
That was one of the points covered by members of a National Association for Fixed Annuities panel on Wednesday. David Wolfe, counsel at Advisors Excel, the nation’s largest insurance marketing organization, said the Trump administration’s recasting of regulations helped open the door a bit wider for annuities in the retirement market.
“This was already shaping up to be a significant year in our industry,” said Wolfe, who hosted the webinar. “We got broad changes to state and federal rules and regulations covering sale of annuities, new legislative initiatives intended to broaden the availability of annuities in retirement accounts.”
Of particular focus was the Department of Labor’s fiduciary rule replacement that was designed to harmonize with the Securities and Exchange Commission’s Regulation Best Interest standard, which went into effect June 30.
Richard Choi, a finance lawyer with Carlton Fields, said the DOL is moving fast to get its newest rule in place before the election, much in the way the Obama administration finalized the fiduciary rule at the end of 2016.
“There seems to be a lot of energy in trying to get it done this year before the election,” Choi said. “It's possible that the comments that come in will request an extension. I don't think those will be granted.”
The 30-day comment period for the DOL rule ends Aug. 6. As of the close of business Thursday, only 17 comments had been filed. None have been made public.
After the Trump administration settled in, it took three years to stop and replace the Obama administration’s fiduciary rule.
Choi said the latest version accomplishes three things:
Restored the original investment advice regulation and the 1975 "five-part test."
Created a broader new prohibited transaction class exemption that would facilitate more transactions without reliance on multiple exemptions.
Restored the prohibited transaction exemptions that were amended in 2016 to their pre-amendment form.
A key difference between the versions is the absence of the Obama administration’s best interest contract exemption, or BICE. That carve-out allowed compensation in sales with retirement money only if the contract were signed by a financial institution, a stipulation that ruled out all but a few so-called super-IMOs.
The new prohibited transaction exemption would be available to financial institutions, such as RIAs, broker-dealers, banks, insurance companies and their employees, reps and agents.
“The proposal covers a wide variety of payments, including but not limited to commissions, trail commission, sales loads, markups, markdowns for principal transactions and revenue sharing from third parties,” Choi said. “The PTE would provide relief for rollovers and also allow for principal transactions. One condition is, of course, you must document the reasons why the rollover is in the best interest of the retirement investor.”
One term in the rule is a new addition – prudence.
“It means that the advice has to reflect care, skill, prudence and diligence,” Choi said. “Keep that prudence in mind because that is a requirement of the ERISA statute. … That's not a word that's used in regulation best interest that the SEC adopted.”
Other issues covered:
National Association of Insurance Commissioners Annuity Suitability Regulation
Eric Arnold, an insurance and finance lawyer with Eversheds Sutherland, said the big news is the rule’s shift from suitability.
“The large font headline is that it moves from suitability to best interest,” Arnold said. “What's required now with respect to recommendations is rather than making sure that the recommendations are suitable, the recommendation has to be in the best interest of the consumer without placing the producers’, or the insurers’ financial interests ahead of the consumers’ interest.”
That best interest standard is built on four pillars: duty of care, disclosure, conflict of interest and documentation. Arnold said the pillars line up with the SEC’s requirements and seem to be something sellers can work with.
“The care obligation is clearly the fuzziest,” Arnold said. “It does not include a definition of best interest. What it does say is that you need to meet the care obligation, you need to know the consumer's financial situation, insurance needs and financial objectives. You need to understand the recommendation.”
Although the NAIC updated the regulation in March, Arnold said it is actually still a work in progress.
“And you would think that the NAIC would probably be done as a result of adopting that reg a couple months ago, but as it turns out, we've learned recently that they aren't really done with this. In fact, while it is a final reg they have reconvened their annuity suitability working group to continue working on issues related to the model reg.”
The continuing work concerns an FAQ that the NAIC committee is putting together and finding that they still need to come up with answers.
“What the annuity suitability working group is trying to do is to put together an FAQ document that will hopefully provide some interpretive guidance to states considering adoption and sort of get folks on the same page as much as possible,” Arnold said, adding that the NAIC will likely put that document out for a 30-day comment period.
SEC Regulation Best Interest
Reg BI does not affect insurance agents, but might create more insurance agents, in a sense, according to Choi.
“In terms of my own clients, I've noticed the trend toward what I call triple licensing,” Choi said. “A broker-dealer moving to ensure that their reps have all the licensing that they need. Not only broker-dealer and investment advisor, but also insurance licensing.”
He said the advisor group affected by Reg BI is somewhat limited because it would not supersede the fiduciary duty standard if someone is acting as an investment advisor.
“When you're giving a recommendation, you're subject to the advisor standard, the fiduciary duty standard, not to the best interest standard,” Choi said. “One difference may be ongoing monitoring versus not. But even then it seems you've got care conflict of interest, you've got a duty of loyalty."
Although the panelists described an alignment of the DOL, SEC and NAIC’s annuity rules that provide greater clarity to the market, it all can go the other way again following the election, Arnold said.
“The other question is with the elections and does a lot of the stuff that we talked today get sort of reset?” Arnold asked. “We don't know what's going to happen yet, but we sort of saw what happened in 2016 with the DOL rule. Whether we're going to see sort of similar sort of redraws in 2020 and beyond.”
Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected]