Regulators were busy in 2021 and annuity sales remained a prime target.
Controversial rules put forth by the Securities and Exchange Commission and New York State regulators attracted plenty of attention and readers. Meanwhile, the Department of Labor made noise about taking another stab at a fiduciary standard.
Here are the top 10 regulation stories of 2021:
The New York Supreme Court sided with plaintiffs in overturning the toughest state annuity sales standard in the nation.
The state Supreme Court Appellate Division reversed a 2019 ruling by Justice Henry Zwack that the New York State Department of Financial Services was within its authority when it issued Regulation 187.
Regulation 187, often described as similar to a fiduciary standard, took effect in 2019 as state officials bypassed a National Association of Insurance Commissioners' effort to create a model standard for annuity sales. The New York regulation applies to life insurance sales as well and sets a high bar for a sale to be in the consumers' "best interest." The court ruling determined that the bar is too high.
The House Ways and Means Committee unanimously passed a bill that would make changes to how U.S. workers save for retirement, making it easier for annuities to find their way into plans. Known as the Securing a Strong Retirement Act of 2021, the bill is colloquially known as "SECURE 2.0."
The latest bill, which did not make it to the president's desk, included the following:
• Allows people who have saved too little to set more aside for their retirement.
• Offers low- and moderate-income workers a tax credit for contributions to a 401(k) or similar plan.
• Helps people with student loans save by letting employers make retirement plan contributions equal to what an employee pays on their loans.
• Further supports the use of annuities that provide guaranteed lifetime income in retirement.
• Creates a new incentive for small businesses to offer a retirement plan.
A key provision addresses the plight of mostly younger workers with limited financial resources and significant student debt. It would permit employers to contribute to a workplace retirement plan for employees making student loan payments. The legislation also allows for larger catch-up contributions for baby boomers close to retirement and increases the age when retirees must take minimum distributions from retirement accounts, allowing more time for savings to grow.
The Department of Labor allowed the previous administration’s final fiduciary advice regulation, officially titled Prohibited Transaction Exemption 2020-02, to go into effect on Feb. 16. The focus of PTE 2020-02 is on broker-dealers and registered investment advisors, but how does this turn of events impact insurance producers?
This story attempted to answer that question.
This new PTE, in itself, probably has little impact on annuity and certain life insurance sales. This is simply an additional way for persons who are categorized as “fiduciaries” under Section 4975 of the Tax Code to qualify to be paid a commission for selling products or services to qualified plan participants and individual retirement account owners. No one is required to use this particular new PTE instead of preexisting ones.
For decades, PTE 84-24 has covered insurance agents and brokers and their affiliates to allow the sale of life insurance and annuities to qualified plans. This option remains available, and the DOL has recently clarified that PTE 84-24 also covers sales to IRA owners and commissions paid to insurance intermediaries as well.
For PTE 84-24 to “permit” the sale of an annuity or insurance policy with qualified funds, the participant or owner must sign a disclosure document authorizing the transaction. The PTE 84-24 disclosure must contain:
1. The nature of any affiliation or relationship with the insurance company whose contract is being recommended, and any limitations on the products that can be recommended.
2. The sales commission, expressed as a percentage of gross annual premium payments.
3. A description of any charges, fees, discounts, penalties or adjustments under the contract.
The preamble to PTE 2002-02 is where we find the important news. It provides commentary regarding how the DOL’s career staff think the regulatory definition of fiduciary investment advice — which dates back to 1975 — should be interpreted in the present retirement savings marketplace.
Broker-dealers, investment advisors and insurance distributors realized in 2021 that they must prepare to comply with the Department of Labor’s investment advice guidance.
The key thing is not to assume that following standards at the Securities and Exchange Commission and FINRA means that they have the DOL covered, according to participants in a webinar presented by compliance consultants Faegre Drinker and Oyster Consulting.
It is clear almost anybody recommending an ERISA plan or IRA rollover will be considered a fiduciary, according to the analysts. If advisors or agents recommending a rollover have or will have an ongoing relationship with the client, they are considered a fiduciary under the DOL’s rules and guidance, said Fred Reish, a Faegre Drinker partner participating in the webinar.
“If an advisor or an agent makes a rollover recommendation today, and it satisfies that regular basis test, or the five-part test, that is a fiduciary act today and you have to engage in a prudent process under ERISA to make the recommendation,” Reish said, referring to the impartial conduct standard. “But that's today, there's no delay on that.”
(The five parts of the test are: “(1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property (2) on a regular basis (3) pursuant to a mutual agreement, arrangement, or understanding with the Plan, Plan fiduciary or IRA owner, that (4) the advice will serve as a primary basis for investment decisions with respect to Plan or IRA assets, and that (5) the advice will be individualized based on the particular needs of the Plan or IRA.”)
A former North Carolina congressman and state Republican Party leader who lied to FBI agents about a bribery scandal was pardoned by former President Donald Trump before he left office in January.
Federal authorities said ex-Rep. Robin Hayes participated in a scheme while GOP state chairman in which a wealthy insurance company magnate attempted to bribe the state insurance commissioner with $1.5 million in campaign funds in exchange for removing a top department regulator. The company executive, Greg E. Lindberg, was convicted last year and is serving prison time. Lindberg had quickly become a major political donor in state politics.
U.S. attorneys said Hayes lied in 2018 to FBI agents even after being presented evidence that his statements were untrue. Prosecutors recommended no prison time for Hayes, however, citing his admission to the crime and cooperation.
Bradford Campbell, Faegre Drinker partner and former assistant secretary of the Employee Benefits Security Administration, said the DOL revealed some far-reaching ambitions along with its guidance focusing on the department’s newest prohibited transaction exemption, 2020-02, which primarily affects broker-dealers and registered investment advisors.
With the newest guidance, the DOL expanded the definition of fiduciary under the original ERISA regulation by interpretation rather than changing the original rule.
“This expansion of the definition of fiduciary is being accomplished by guidance by the DOL saying we're not changing the words of the old rule, we've just decided they mean something different than they used to,” Campbell said. “The effect of that, as of Feb. 16, is that if you're recommending a rollover, you're now in most cases going to be providing ERISA fiduciary advice, whereas in the past the DOL’s official position was most rollovers were not.”
Campbell said that represents a big change for everybody across the financial spectrum.
“Regardless of the license you have, or what standard you advise under in your normal career as a financial professional, ERISA would now apply to that,” Campbell said. “And the effects of that are pretty far reaching.”
Washington banned using credit scores in setting insurance rates and its insurance commissioner urged all states to do the same in this story.
Washington Insurance Commissioner Mike Kreidler sent a letter to his colleagues at the National Association of Insurance Commissioners urging all states to abandon using credit scores for setting insurance rates.
Along with Washington, California, Hawaii, Maryland, Michigan and Massachusetts ban or limit insurance companies’ use of credit scores to rate policies, according to the Washington Department of Insurance.
Kreidler issued the ban after the Consumer Federation of America issued findings in January showing that consumers with poor credit pay 79% more than drivers with excellent scores “all other things being equal,” according to the report.
Will partisan gridlock always be on the Congressional menu? Or are there some issues on which Democrats and Republicans can work together?
“The only thing limiting bipartisanship is the willingness to try,” said Sen. Kyrsten Sinema, D-Ariz., during a webinar held by the Insured Retirement Institute. The IRI webinar focused on ways Congress can move from gridlock to action to help address Americans’ financial and retirement challenges.
Sinema, a member of the Senate Banking Committee, pointed to the Senior Security Act of 2021 as an example of a bill that she believes has enough support from both sides to become law. The creates a “Senior Investor Taskforce” within the Securities and Exchange Commission charged with identifying problems senior investors encounter, including financial exploitation and cognitive decline, as well as identifying regulatory changes that could help senior investors.
Rep. Bryan Steil, R-Wis., said taking bipartisan steps to get smaller bills passed paves the way for bipartisan efforts to pass bills with more far-reaching impacts.
Lincoln Financial became the latest company to pull insurance products out of New York. Lincoln exited because its electronic signature process does not comply with the state’s requirements, according to the company’s statement.
Lincoln is just the latest of many companies that have pulled products from New York under pressure from regulations as well as market conditions, such as persistent low interest rates.
For example, John Hancock pulled several life products, leaving only Accumulation IUL and Protection Term as the products it sells in New York.
The New York Department of Financial Services appealed an April 29 decision by a state court tossing out Regulation 187, the state's tough rules governing the sales of life insurance and annuities.
At issue is whether the DFS has the authority to make the sales rules. The April state Supreme Court Appellate Division reversed a 2019 ruling by Justice Henry Zwack that the DFS was within its authority when it issued Regulation 187.
Regulation 187, often described as similar to a fiduciary standard, took effect in 2019 as state officials bypassed a National Association of Insurance Commissioners' effort to create a model standard for annuity sales. The New York regulation sets a high bar for a sale to be in the consumers' "best interest." The appellate division ruled that the DFS set the bar too high.
Ayo Mseka has more than 30 years of experience reporting on the financial-services industry. She formerly served as Editor-In-Chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]