NAIC Annuity Sales Rule Proposal Faces Showdown In Chicago

By John Hilton

The stakes will be high when Idaho Insurance Commissioner Dean Cameron gavels a special meeting Monday afternoon to continue work on an annuity sales model law.

A National Association of Insurance Commissioners’ working group is again meeting in person – this time in Chicago – in another bid to bridge a seemingly unbridgeable divide between conservative and liberal factions.

When the group last gathered – during the August NAIC Summer Meeting in Boston – New York officials pressed for a best-interest model law that includes life insurance as well as annuities.

"Certainly this committee should keep active in this and not just accept the working group's report and move on," New York Superintendent of Financial Services Maria Vullo said at the Life Insurance and Annuities Committee meeting. "There's no reason that the suitability should not apply to both, annuities as well as life insurance."

That committee oversees the Annuity Suitability Working Group, and will vote to accept or reject any sales model law it produces.

The working group met in Kansas City for a special meeting May 31-June 1 and declared life insurance outside of its charge. That came over the objections of James Regalbuto, New York deputy superintendent for life insurance.

Regalbuto could not be reached for comment on what he will support in Chicago. Cameron has said he wants the working group to have a “consensus” on an annuity sales rule in time for the NAIC Fall Meeting Nov. 15 in San Francisco.

Some progress was made during the Kansas City meeting, with conservative members of the board, from states such as Iowa, winning on most points. The working group's parent committee, then the NAIC executive committee must vote to accept any model law before it can be sent to the states for adoption.

A Widening Gulf

While the NAIC struggles to finish its work, partisans on both sides are moving fast to firm up their own positions.

New Jersey became the latest of a handful of states pursuing tougher best-interest or fiduciary regulations when it released its rule last week. In its “notice of pre-proposal,” New Jersey broadly outlined a rule to hold brokers, agents, investment advisers and investment adviser representatives to a fiduciary duty when providing investment recommendations to clients.

“Investors remain without adequate protection from broker-dealers who, under the suitability standard, are permitted to consider their own interests ahead of their client’s interests,” the proposal reads.

The proposal lack specifics on how the rule would work. New Jersey is accepting comments on the pre-proposal through Dec. 14. Two conferences are planned – on Nov. 2 and Nov. 19 in Newark.

Comments should be sent by Dec. 14 to: Christopher W. Gerold, Bureau Chief, Bureau of Securities, PO Box 47029, Newark, New Jersey 07101, or electronically here.

Several other states have rules in the works, but none tougher than the aforementioned New York rules. The New York rules come with an effective date of Aug. 1, 2019, for annuity contracts, and six months afterward for life insurance contracts.

"Standards of care applicable to broker-dealers and investment advisers remain an entirely fluid area at the federal and state levels," the Philadelphia law firm Stradley Ronon said in a newsletter update. "The question then becomes not if a major fiduciary standard of care development will occur in the near future, but by whom and when."

‘Alternative Approach’

Meanwhile, an industry group -- The Fixed Annuity Consumer Choice Campaign -- released its proposal to “require stronger disclosures including a client relationship summary and producer compensation notice.”

“The NAIC should not tamper with the model suitability law and should instead focus its efforts on advancing consumer protection through better communication between agents and policyholders,” said Dwight Carter, who runs an annuity marketing organization in Raleigh, N.C., and chairs the FACC.

The FACC proposal has three elements, Carter said, which include a detailed client relationship summary similar to what is being proposed by the SEC for securities brokers; a notice of producer compensation similar to what has been adopted in New York; and provisions restricting and improving disclosure of non-cash compensation.

FACC’s proposal is fashioned as an amendment to the NAIC’s model annuity disclosure regulation rather than the model suitability regulation.

FACC has been closely monitoring the NAIC suitability working group deliberations and thinks the NAIC is struggling because many regulators sense a best interest standard could have unintended consequences, said industry veteran Kim O’Brien, including turning agents into fiduciaries.

“We believe the best interest proposal adopted in New York goes much too far and represents what can go wrong with the NAIC approach, which is exactly why we think our alternative makes better sense for the insurance industry,” O’Brien added.

FACC may seek to make a more formal proposal to the NAIC Life Insurance and Annuities Committee, Carter 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 [email protected]. Follow him on Twitter @INNJohnH.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.