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DOL Rule’s Ghost Still Fights On Conduct Standards

One thing became crystal clear during 2018: Anyone selling annuities is going to be doing business under tougher regulations.

And a related message was also apparent — it’s coming sooner rather than later.

The best-interest trend at the state and agency level might be considered a stunning development at first glance. After all, a conservative, anti-regulation mood swept into Washington, D.C., with the Trump administration, leading to the death of the hated Department of Labor fiduciary rule.

With President Donald J. Trump ensconced in the White House and Republican majorities in both chambers of Congress, tighter annuity sales regulation was unexpected. Certainly, it wasn’t expected so quickly.

But the extended DOL rule fight essentially provided three years of education and change for all involved.

Regulators settled on “best interest” as a compromise standard to bridge the gap between fiduciary and suitability. Meanwhile, insurers spent millions to upgrade compliance systems in anticipation of the DOL rule taking effect.

By the time the Securities and Exchange Commission — under Trump-appointed Chairman Jay Clayton — announced it would pursue a best-interest standard for brokers, it did not seem shocking.

“(Investors) can’t expect the things we can’t give them, but what can they expect in a reasonable commercial relationship?” Clayton said during FINRA’s annual conference. “They can expect the core principle that the professional can’t put their interests ahead of the investor.”

SEC Package

The SEC officially dropped its bombshell with an April 18 meeting and tentative vote to put a package of three rules out for public comment.

The proposal calls for a best interest standard and requires brokers to establish policies and procedures to identify and avoid conflicts. A new customer relationship summary disclosure would enhance the investor’s participation in the relationship with their broker, SEC staff said.

Additionally, the titles “advisor” and “adviser” would be more strictly defined. What is nowhere to be found is a private right of action giving investors the right to sue, a controversial component of the Department of Labor fiduciary rule.

Highlighting the difficulty in finding a middle ground, the SEC proposal found immediate criticism from both sides. SEC Commissioner Kara Stein dismissed the package as a lightweight attempt at regulation.

“The proposals before the commissioners today squander the opportunity for us to act in the best interest of investors,” she said. “It merely reaffirms that broker-dealers need to meet their suitability obligations.”

Meanwhile, industry executives are particularly concerned about vague language regarding “mitigation” of conflicts.

“It is unclear what specific concerns the commission is trying to address around mitigating conflicts, or what additional mitigation measures it is seeking,” wrote Marc Cadin, chief operating officer for the Association of Advanced Life Underwriting. “There should be flexibility around mitigating conflicts of interest — it should be based on individual facts and circumstances, rather than establishing a one-size-fits-all framework.”

Those issues could be ironed out in a final rule, which might be married to a revised DOL rule. The initial DOL fiduciary rule was tossed out by a federal appeals court in June.

The Office of Management and Budget issued a fall agenda that lists a final rule for the DOL’s fiduciary and SEC’s Regulation Best Interest standards due in September 2019, noted Bradford P. Campbell, a partner with Drinker Biddle, a Washington, D.C., law firm.

“It’s the DOL and the SEC trying to end up in the same place in terms of regulation,” said Campbell, former assistant secretary of labor for employee benefits and former head of the Employee Benefits Security Administration

States In Play

If there is a problem bigger than tough regulation, it’s inconsistent regulation. And some eager state insurance officials brought that into play in 2018 — starting with New York.

Under the direction of Gov. Andrew Cuomo, New York approved tough best-interest standards that apply to both life insurance and annuity sales.

Those rules take effect Aug. 1, 2019, for annuity sales and six months afterward for life insurance.

Some insurers, such as Allianz, do not do business in New York, so the new tough rules are not as much of a concern. However, industry officials fret that other states will adopt the Empire State framework.

“It’s going to result in this very uneven, patchwork of regulation that is very difficult for regulators to enforce and difficult for consumers to understand,” said Kim O’Brien, CEO of AssessBEST, a compliance software company.

Other states are already pushing regulations of their own. Connecticut, New Jersey and Maryland officials all have proposed legislation that would establish fiduciary standards in their states.

In Maryland, a financial reform bill was brought to the table by Democratic State Sen. James Rosapepe. Rosapepe’s bill leaves room for the SEC to create and adopt new legislation before it acts independently on the matter; a chance not given by the other states.

In the meantime, a National Association of Insurance Commissioners’ working group toils to produce an annuity transactions model law. The outlook is bleak for their efforts after several meetings and calls this year failed to bridge the gap between conservative states such as Iowa and liberal states such as New York.

The working group last met in October in Chicago, but discussions broke down over whether to apply new rules to existing annuity contracts.
What happens next is anyone’s guess.

“Whether other states will follow the New York model, we don’t know, but it’s concerning,” O’Brien said. “The whole idea of the NAIC model is to establish uniformity across the 50 states.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected]

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