A National Association of Insurance Commissioners subgroup will meet in person this month on its best-interest annuity standard after contentious commissioners pushed the model law back out for public comment.
The Annuity Suitability Working Group met March 24 in Minneapolis at the NAIC Spring Meeting, ostensibly to finalize its annuity transactions model law. Instead the group voted to re-open the public comment period for another 30 days.
New comments were accepted through April 27. According to two people who attended the meeting, some members wanted to give groups the opportunity to recast their comments in light of the March 15 decision by the Fifth Circuit Court of Appeals overturning the Department of Labor fiduciary rule.
That decision lines up with the best-interest approach coming out of states such as Iowa, which has a heavy insurance presence. Iowa Insurance Commissioner Doug Ommen could not be reached for comment.
“I think that there’s been a misunderstanding with regard to what suitability really is,” Ommen said during a recent conference call, adding that the standard has been strengthened through the years to add disclosure requirements, for one example. “Our current rule already has a lot more than an old-line traditional suitability principle.”
On the other side, states such as New York want the NAIC model law to adopt the tougher standards contained in the DOL rule. In particular they want the impartial conduct standards that went into effect June 9, 2017.
The friction between the two sides was evident during the March 14 conference call, during which the working group only reached a consensus on minor language issues.
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.
Just a First Draft
Working group leadership downplayed the draft law during its March 14 call, adding that it was only meant to get the ball rolling. NAIC model laws must then be adopted by a state before they are applicable.
Several states, including New York, Nevada, New Jersey and Connecticut, bypassed the NAIC and moved to produce their own best-interest standards. Those rules are in various stages of development.
The DOL rule’s impartial conduct standards should be “a guide” for the NAIC standard, said James Regalbuto of New York during the March 14 call.
Those standards require annuity sellers into retirement accounts to act as a fiduciary, make no misleading statements and accept only “reasonable” compensation.
But thanks to the Fifth Circuit decision, the impartial conduct standards could go away as early as May 7. The Department of Justice has until then to decide whether to appeal to court decision.
Judge Edith H. Jones wrote in the majority opinion that the DOL rule “fails the reasonableness test” of the Administrative Procedures Act by extending the department’s ERISA authority to one-time IRA rollovers and similar transactions.
The decision went on to admonish the DOL for exceeding its authority and re-affirmed the role of Congress, the states and the Securities and Exchange Commission in regulating agents and advisors.
If the ruling holds, it could open the door for the NAIC law to have a far greater impact than it initially appeared.
A Model’s Model?
As superintendent of financial services for New York State, Maria T. Vullo has been outspoken about tougher regulations. In a comment letter, New York urged the NAIC to adopt the state’s best interest proposal, which extends fiduciary responsibility to life insurance.
There is precedent for New York pushing insurance commissioners to a tougher standard.
A similar NAIC working group went through several iterations of a cybersecurity model law before adopting a final version that hewed closely to the New York State regulation that took effect in March 2017.
Some members say New York is hoping for a repeat with its hard-line fiduciary standard.
“We believe that acting in the ‘best interest’ of the consumer is an appropriate standard for these products, which often are relied on by consumers as retirement security and estate planning,” Vullo said in a letter.
The DOL rule only applies to the sale of products using retirement dollars, whereas the New York proposal would extend to all sales of life insurance and annuities.
A transaction is considered in the best interest of a consumer when it is “in furtherance of a consumer’s needs and objectives and is recommended to the consumer without regard to the financial interest of the product seller,” Gov. Andrew Cuomo said in a statement.
Insurers would also be required to develop and maintain procedures to prevent financial exploitation of consumers.
The New York amendment completed its comment period in late February. DFS officials could make revisions, which would necessitate another comment period, or move to enact the regulation as written.
It is very likely that a best-interest standard is approved by the end of 2018, a source said.
SEC Keeps Working
Meanwhile, the Securities and Exchange Commission continues working on a best-interest standard behind closed doors. Few details have emerged on the SEC process other than the infrequent public comments from Chairman Jay Clayton.
A few important recent developments are working in the SEC’s favor. For starters, Commissioners Hester M. Peirce and Robert J. Jackson Jr., both nominees of President Donald J. Trump, joined SEC commissioners Kara Stein, Michael Piwowar and Clayton to give the agency a full commission for the first time since late-2015.
But the Fifth Circuit decision is probably the biggest and best news the SEC could have hoped for as it works to finalize its rule. For the record, Clayton has said the appeals court ruling will have no impact on the SEC rule.
“While I think that’s probably true, it is the case that now that there’s a blank slate that the SEC has to work with,” noted Steve Boms, a public policy advisor for Envestnet. “It becomes much easier for the SEC to put forth a rule without worrying about harmonizing its efforts with the Department of Labor.”
The SEC is expected to produce its rule by the second quarter of 2018, a timeline that could be impacted by the Fifth Circuit decision. SEC staff had the framework of a fiduciary rule from the days of Chairwoman Mary Jo White.
While many of the same staff members remain, Clayton is a Trump appointee and will put his own stamp on the proposal, Boms said.
“He and the commission staff are seeking to be very deliberate and methodical,” he said. “I would expect a prolonged process.”