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In Whose ‘Best Interest’?

“Best interest” is the new “fiduciary rule” on the minds of regulators, consumer groups and industry professionals.

State and Securities and Exchange Commission regulators are scrambling to finalize best-interest standards after a late-game appeals court decision tossed out the Department of Labor fiduciary rule.

While the Obama-era DOL rule ultimately failed, it left a legacy of change in its wake. Many insurers and distributors tightened up processes, with most saying they will not go back.

For their part, regulators see the need for new standards. What those standards look like is the subject of ongoing, and at times contentious, debate with many sides.

“We’re looking for very clear and objective rules,” Wesley Bissett, senior counsel for government affairs for the Independent Insurance Agents and Brokers of America, told state insurance commissioners. “Whatever it is that you want agents to do, we wish you would just spell it out.”

State On State

New York regulators represent the hard-line, best-interest camp. Superintendent of Financial Services Maria Vullo broke with her peers and pushed through rules that apply to life insurance as well as annuities.

Those rules take effect August 2019. Meanwhile, the National Association of Insurance Commissioners is working on a model law it hopes to send to the states for adoption by the end of the year.

Its best-interest version applies only to annuities — for now.

During the NAIC Summer Meeting in Boston, Vullo indicated she will challenge the organization on that point.

“Certainly this committee should keep active in this and not just accept the working group’s report and move on,” she told colleagues on the NAIC Life Insurance and Annuities Committee. “There’s no reason that the suitability should not apply to both, annuities as well as life insurance.”

It is a challenge New York won in the past. In particular, it jumped out ahead of the NAIC on a cybersecurity standard that the organization later largely duplicated as its model law.

Still, many in the industry do not see that situation repeating.

“I think we would be surprised if we saw the same playbook this time around,” said John Matovina, CEO of American Equity. “I don’t think there’s any momentum for the NAIC to pick up on what New York has already adopted.”

The New York rules are “our worst fears come true,” said Kim O’Brien, CEO of AssessBEST, a compliance software company.

“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,” explained O’Brien, who met with several state officials. [Disclosure: INN Publisher Paul Feldman is part owner of AssessBEST.]

The Details

The New York rules come with an effective date of Aug. 1, 2019, for annuity contracts, and six months afterward for life insurance contracts.

The New York rules would:

» Require disclosure of all suitability considerations and product information that form the basis of any recommendation.

» Permit agents or brokers to make a recommendation only if they have a “reasonable basis to believe that the consumer can meet the financial obligations under the policy.”

» Prohibit an agent or broker from telling a consumer that a recommendation is part of financial planning, investment advice or related services (unless the agent or broker is a certified professional in that area).

Additionally, the proposed regulation would require insurers to “establish and maintain procedures to prevent financial exploitation and abuse.”

Insurers will likely have to make a decision whether to pay higher compliance costs to do business in New York, said William T. Mandia, a partner at Stradley Ronon, a Philadelphia law firm.

“It’s such a large market that I can’t imagine that life insurers on the whole will avoid it,” he said. “So I think the question is going to become: Who stays in and what impact does it have on the way things are priced?”

NAIC Standards

As of press deadline, an NAIC working group was still debating the details of its best-interest regulation.

The first of a series of nonbinding “straw poll” votes saw the group agree on best-interest principles, but under a different name.

Going with the best-interest standard “would raise significant challenges when we bring the regs to our legislature,” said TDCI Assistant Commissioner Michael Humphreys of Tennessee.

The liberal faction gained a concession with language requiring the producer to disclose the basis for any new recommendation to the consumer.

Likewise, the group voted to extend the suitability requirements for in-force recommendations as well as for new clients. That could be significant, industry sources say.

In addition to extra work and increased liability exposure, tweaking existing policies generally does not pay an agent nearly as much as servicing a new client, an industry representative said following the meeting. So some clients are likely to lose out on those necessary retirement-planning adjustments.

Working group Chair Dean Cameron was unmoved by the arguments during the NAIC Summer Meeting.

“Any time an agent is in front of a consumer, they have a responsibility to review the information ... and determine whether their decisions are suitable, especially if [the clients] are investing additional money,” the Idaho insurance commissioner said.

SEC On Twin Track

The period to comment on the SEC’s proposed rulemaking package that includes Regulation Best Interest closed in early August.

The SEC proposal will hold brokers to a best-interest standard of care similar to a fiduciary standard, Chairman Jay Clayton has said.

Investors, financial professionals and special-interest groups flocked to the site during its waning hours to weigh in on the proposals before the lengthy 90-day comment period was up.

AARP drove more than 10,000 people to the SEC’s comment page in support of Regulation Best Interest. Other groups such as the Consumer Federation of America spoke loudly in opposition.

“One of the key problems with this proposal is that you can’t tell what it means,” said Barbara Roper, director of investor protection for the CFA.

Investors and financial professionals joined the discussion too.

One comment from a 26-year-old investor reads, “I have reviewed the three proposed disclosures. They are difficult to understand and are not clear in what they are trying to do. Many terms are not defined; not everyone will understand what a brokerage account is. If the idea is to give investors information to help them understand whether their brokers or advisors are harming them, these disclosures do not achieve that end.”

Advisors left feedback for the commission as well.

“As a fee-only fiduciary advisor, I’m concerned with the Regulation Best Interest proposal. Specifically, the introduction of a new Regulation Best Interest standard would allow broker-dealers to say they act in the best interests of their clients, without actually being subject to a full fiduciary duty to require it. This creates an unfair competitive environment for fiduciary advisors like myself,” said one fiduciary advisor.

Now that the comment period is over, the SEC has said previously that it would take time to analyze the comments and feedback it received before it begins altering the rulemaking package.

The commission did not specify how long its analysis would take, but it is known that the proposed Form CRS will go through testing before it’s revealed in its final form.

Don’t anticipate having the proposal in its final form this year. Industry professionals say, best-case scenario, Regulation Best Interest and the rest of the proposal will take effect in 2020. 


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].

Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @INNCassieM. [email protected].

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