NAIC Comments Show Increasing Opposition to Best Interest Model Law

By John Hilton

A pair of major developments on the fiduciary rule front is motivating stronger opposition to the National Association of Insurance Commissioners' annuity transactions model law.

The NAIC initially shut off comments on its model law Jan. 20. Since then, its annuity suitability working group has been unable to come to a consensus on a model law, instead agreeing to another 30-day public comment period.

Meanwhile, the Fifth Circuit Court of Appeals tossed out the Department of Labor fiduciary rule March 20. Nearly a month later, the Securities and Exchange Commission tentatively adopted a best interest rule covering broker-dealers.

Several new commenters mention those two developments in criticizing the NAIC proposal.

"The paradigm within which the working group has been operating over the past year has shifted dramatically," wrote Chip Anderson, executive director of the National Association for Fixed Annuities. "While we understand that there is a desire to revise the standard of conduct required of insurance professionals in annuity transactions so that they harmonize with the standards required of investment advisors and broker-dealers, it is unclear what the SEC proposed package of regulations will end up looking like in its final form."

Trying to Create a Uniform Standard

The NAIC is attempting to adopt a model law that states can then put in place, creating a uniform standard. Some industry critics say it too closely mimics the Department of Labor fiduciary rule, while others say it doesn't go far enough.

The working group tried a conference call, then met in person March 24 at the NAIC Spring Meeting, but made little progress. A new meeting is set for May 31-June 1 in Kansas City to try and hammer out a model law.

Similar to the DOL rule, the NAIC model would place limits on agent compensation, require more disclosures and set a “best interest” standard. The standard would apply to annuity sales only.

"The NAIC should make full disclosure the main theme of its upcoming suitability model," wrote Ryan D. Brown, a Michigan lawyer and licensed life insurance producer. "One of the best aspects of requiring full disclosure is that it would not dissuade or prohibit incentive within the industry. Rather, disclosure and transparency almost always guarantee that informed parties will make the most rational decisions."

Jackson National and Axa co-wrote a comment letter urging the NAIC to exempt fee-based annuities from any model law.

Life Insurance Debated

Once again, the New York State Department of Financial Services submitted a comment letter calling on the NAIC to adopt its best-interest proposal, which covers life insurance as well as annuities.

New York released its regulation ahead of the NAIC and is reviewing comments it received.

"Many of the comments expressed support for, or a willingness to work towards, a best interest standard for annuities and life insurance," wrote Maria T. Vullo, superintendent of the DFS.

Among other pro-regulation groups, the Consumer Federation of America and the Center for Economic Justice proposed adding "prohibited practices" to the NAIC model law. Those prohibitions closely resemble the impartial conduct standards included in phase one of the DOL fiduciary rule.

The standards, which took effect in June 2017, call for advisors to make best-interest recommendations only, make no misleading statements, and accept only "reasonable" compensation.

The CFA/CEJ version is the same, but specifically bans sketchy sales contests and other gimmicks. The consumer groups also called for life insurance to be added to the model law.

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.

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.