NAIC Veteran Regulator ‘Concerned’ About SEC Best Interest Rule

Signs of tensions between state regulators and the Securities and Exchange Commission over their simultaneous work on a best-interest standard were evident at a Washington, D.C., conference this week.

SEC official Paul Cellupica let out a nervous chuckle when asked how the SEC best-interest rule is being received by other regulators. He appeared at the Insured Retirement Institute's Action18 government affairs and technology conference.

"Not everyone is going to be happy or ecstatic with what we've proposed," said Cellupica, deputy director of the SEC Division of Investment Management. "There's been a general recognition that we're at least asking the right questions."

Cellupica was followed on the stage by Iowa Insurance Commissioner Doug Ommen, vice chairman of a group trying to rewrite the National Association of Insurance Commissioner's annuity transactions rule.

The SEC proposal to tighten regulations on broker-dealer sales could wreck decades of state oversight, Ommen cautioned. States oversee insurance sales under the suitability standard, Ommen noted, and it works well.

"Suitability is not a dirty word," he said. "So often in common conversation people are somewhat fearful of advocating for good suitability standards. ... I believe it's a very effective means of protecting consumers."

The SEC regulates securities, as well as insurance products that act like securities, such as variable annuities. Otherwise, states have domain over insurance products. The industry is urging both camps to work together, and Ommen acknowledged the SEC has a tough job.

"If you're trying to create something that is 'best interest,' but less than fiduciary, it creates some challenges," he added. "I am concerned about using that phrase 'best interest' and have it start mean something different than what it means under state common law."

Other words in the SEC rule, such as "prudence" and "loyalty" have been defined in state suitability law, Ommen said. Those words mean something different the way the SEC uses them, he said.

"I think that's very important that we start looking at the structures of the rules," he said.

Peter W. LaVigne, partner at Goodwin's financial industry and fintech practices, envisioned a reverse scenario from the competing SEC rule language.

"I think that having a set of standards and definitions consistently applied by the SEC could bring order out of chaos if states adopt the federal standards in place of the multiplicity of standards now in effect," he said.

The SEC rule was tentatively adopted last month and will be subjected to public comment until Aug. 7. It sets a best-interest standard for brokers that is undefined. The agency considered going the full fiduciary route, Cellupica said, but opted for the middle ground.

"The thought was that the SEC has a lot of experience, decades of experience in the securities area, it has broad jurisdiction," he said. "So the SEC was well positioned to put out a proposed standard of conduct that would be a focal point for other regulators."

Pressed on the issue, Cellupica said "we don't necessarily believe the SEC has the authority to preempt all other regulators." But a best-interest standard that tightens up defenses against bad behavior while preserving consumer choice and access to financial advice is an serious goal for the agency, he added.

"The hope is that other regulators will acknowledge that as well," he said.

Meanwhile, the NAIC annuity suitability working group meets next May 30-June 1 in Kansas City in another attempt to work through its differences on a new model law. So far, the working group has been unable to agree on a best-interest standard model law to take to the states for adoption.

The working group expects to work out disagreements and "reach a consensus," Ommen said. SEC Chairman Jay Clayton is eager to meet with the NAIC, he acknowledged.

"They've been very open to having us come in and visit," Ommen said, adding his hope is for a harmonious regulatory scheme. "We share the regulatory space."

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.

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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.