The power of a united voice

In 2023, California introduced legislation that would have established a standard for life insurance and annuity sales that would have gone further than a similar, very problematic, standard in New York (Reg. 187). The introduction of this legislation would have been the potential beginning of a patchwork of laws and regulations in different states across the country that would have created different standards for producers, depending on the client’s location, and hindered access to advice and products.

The bill, as introduced, would have:

» Eliminated all forms of non-cash compensation, including health and retirement benefits.

» Created a required list of 15 factors that must be collected from the consumer, and if the financial advisor was not able to collect the information or the consumer did not provide it, the advisor could not issue a recommendation.

» Held a financial professional to a higher standard of care than a client who purchases a product directly from a carrier.

» Required multiple disclosure requirements over the course of the process and would set an incredibly high threshold to recommend a product replacement.

» Potentially made it impossible to make a commission-based sale. 

A coalition led by the Association of California Life & Health Insurance Carriers, which consisted of Finseca, the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, the Insured Retirement Institute, the National Association for Fixed Annuities, the Federation of Americans for Consumer Choice, and the Independent Insurance Agents and Brokers of America, united in strong opposition to the introduced legislation.

Thanks to the work of this coalition, the legislation was amended throughout a yearlong legislative process to align with the National Association of Insurance Commissioners’ Best Interest Standard for Annuities. Gov. Gavin Newsom recently signed SB 263, and California joined 44 other states in adopting the NAIC standard. Let’s take a look at why that is so important. 

Where the NAIC comes in

More than 80 years ago, Congress gave states the responsibility to regulate insurance, and insurance regulators from across the country have been working together and convening under the NAIC umbrella to consistently prioritize the interests of consumers when regulating all facets of insurance.

NAIC is made up of regulators from every state, reflecting a broad political spectrum, and its work requires bipartisan support to ensure policies can be implemented broadly in individual states around the country. That is why the work the NAIC did in developing the Suitability in Annuity in Transactions Model Regulation (No. 275) is such a big deal.

In response to the 2016 proposed fiduciary rule from the federal government, a rule that was struck down by the U.S. Court of Appeals for the Fifth Circuit, the NAIC began work on a best-interest standard that would apply to annuities. This work took time and much debate, yet the NAIC remained steadfast in its commitment to formulating a standard consistent with the Securities and Exchange Commission’s Reg. BI. This standard preserves consumer choice by accommodating both fee-based and commission-based products while upholding a rigorous level of consumer protection.

Model regulations are generally rare within the NAIC because they need broad support for passage. This is why the NAIC more commonly develops model bulletins or guidance as opposed to model regulation. In the case of a model regulation, the regulation must first receive a majority vote of the task force or working group where it was initially developed. The regulation then must receive at least two-thirds support from its parent (letter) committee. Upon achieving that vote, the regulation must go before the plenary committee — which comprises the full NAIC membership — where it must also receive a two-thirds vote. This process tends to take years from beginning to end, and after that work, Model Regulation 275 was adopted in 2020 with only one opposing vote.

Then it’s up to the states

The work for a model regulation doesn’t end at the NAIC, though. Even though the NAIC may overwhelmingly adopt a regulation, it is up to each state to go through the process of adopting the model regulation in some form in their jurisdiction. This process varies, as each state tends to have its own process for adoption. Some states may be able to go through a regulatory adoption. Other states are required to introduce legislation and go through the entire legislative process. Still others have to introduce legislation, pass legislation and then go through a regulatory adoption process afterward. These processes allow for input, changes and replacement of language — similar to any other issue.

This is exactly why the NAIC Best Interest Standard for Annuities and its adoption are so extraordinary. They demonstrate the commitment of the NAIC, individuals, state regulators and the industry to creating a standard that protects consumers while preserving access to advice. The standard has been consistently adopted in 45 states and allows for reciprocity and compliance across all states that have adopted it.

The work that happened in California is a great example of how, when the industry and regulators join forces, achieving FINancial SECurity for All becomes attainable. 

Melissa Bova joined the Finseca government affairs team in November 2021 as its first vice president of state affairs. She may be contacted at [email protected].