What You Need to Know About Changing Insurance Regulations
Recent Federal activity at the Department of Labor (DOL) and the Securities and Exchange Commission (SEC), as well as actions by the National Association of Insurance Commissioners (NAIC) and individual states will have a direct impact on how agents and distributors can sell and be compensated.
Let’s break down the insurance regulations and explain what it all means so that you’re aware of how these rules will affect your business:
1. DOL Fiduciary Rule
When the DOL’s final “Fiduciary Rule” was released on April 6, 2016 under the Obama Administration, it sent shockwaves through the financial services industry.
The Rule expanded the definition of “fiduciary investment advice,” under the Employee Retirement Income Security Act (ERISA), broadly sweeping financial professionals who provide retirement planning advice under a fiduciary standard.
The receipt of variable compensation by someone considered to be a fiduciary resulted in a prohibited transaction. Therefore, compensation such as commissions could not be received unless an exemption under the Rule could be applied.
Prior to the DOL Fiduciary Rule, agents selling variable, fixed, and fixed indexed annuities were granted a specific exemption under a provision referred to as “Prohibited Transaction Exemption (PTE) 84-24.” A revised version of this exemption became enforceable in July 2019.
BICE & Variable, Fixed-Indexed Annuities
Under the Fiduciary standard, the exemption was redefined to only apply to fixed annuities. Distributors selling variable and fixed indexed annuities would need to look to another provision of the Rule referred to as the “Best Interest Contract Exemption (BICE).”
This exemption placed a much higher burden on the agent by requiring a contract between the agent and customer to be executed prior to the recommendation being made.
The BICE also required detailed disclosure of compensation, as well as potential conflicts of interest and steps to mitigate them, acknowledgment of a fiduciary duty, and warranties on the part of the agent and the financial institution.
Those distributors selling variable and fixed indexed annuities and working on commissions were most directly affected.
The insurance industry argued that the Rule would result in restricted access to retirement planning products and services such as annuities, particularly for small to moderate retirement savers.
The Rule Rollercoaster Continues
The Rule has been subject to delays and legal challenges since its introduction. One provision of the Rule referred to as the “impartial conduct standards” went into effect in June of 2017. These standards state that agents must act in their clients’ best interests, not make misleading statements, and receive reasonable compensation.
However, the DOL is not enforcing this provision, stating it will not pursue claims against agents acting in good faith on behalf of their customers to follow these standards.
In Oct. 2017, shortly after taking office, President Trump called for a further delay pending an examination of the Rule. Full implementation of all aspects of the Rule was ultimately delayed until July 1, 2019.
Early lawsuits challenging the Rule were found in favor of the Rule. However, on Mar. 15, 2018, the 5th Circuit Court of Appeals issued a 2-1 ruling rejecting the Fiduciary Rule in its entirety on the basis that the Rule was unreasonable and that the DOL did not have sufficient authorization.
2. SEC/FINRA Fiduciary Standard
The SEC and the Financial Industry Regulatory Authority (FINRA) are working on their own Fiduciary Standard.
However, because the SEC’s jurisdiction is limited to registered products, such a Rule would only apply to sales of insurance products that are also considered to be securities such as variable annuities.
3. NAIC Best Interest Standard of Care
State regulation of annuity sales is based on the NAIC’s Suitability in Annuity Transactions Model Regulation.
Shortly after the Fiduciary Rule was introduced, state regulators (through the NAIC), insurance industry representatives, and consumer advocates began discussing making enhancements to the current annuity suitability standards to develop a “best interest standard of care.”
Parties called for the DOL, SEC/FINRA and NAIC eﬀorts to be harmonized so as not to end up with different and conflicting standards.
There is a problem with the current regulations—distributors put themselves first. That was the message delivered by consumer advocates during a meeting of the NAIC’s Annuity Suitability Working Group on March 24th.
They went on to suggest that new standards should apply to all “investment-type” products including life insurance, and that conflicts of interest must be more strongly addressed and disclosed.
The Chair of the Working Group, Insurance Director Dean Cameron from Idaho, expressed a different view. He argued that the current suitability standard is working, that agents and distributors do act in their clients’ best interests, and that any enhanced standard that is developed should not be another version of the Fiduciary Rule.
Trade groups representing the industry weighed in, too.
The American Council of Life Insurers (ACLI), the Insured Retirement Institute (IRI), and the National Association of Insurance and Financial Advisors (NAIFA) voiced their continued support for the development of an appropriate best interest standard of care for sales of annuities.
Director Cameron indicated that in light of the recent court ruling against the Fiduciary Rule, he and NAIC leadership want to take a step back and reassess their eﬀorts to develop a best-interest standard for annuities beyond suitability.
Where does that leave us?
At this point, it is still unclear if state regulators will pursue changes to the current Annuity Suitability Model to adopt an enhanced best interest standard of care. Until any changes are made, state requirements based on the current NAIC Annuity Suitability Model apply, and the impartial conduct standards of the Fiduciary Rule are in effect.