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NAIC's Suitability Effort Seems To Be Edging Toward Consensus

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NAICs Suitability Effort Seems To Be Edging Toward Consensus


Tentative optimism is being expressed that a recent roll-up-your-sleeves work session will result in a sales suitability model regulation that will enjoy broad support.

At press time, a new draft of the suitability model–the Senior Protection in Annuity Transactions Model Act and Regulation–from the National Association of Insurance Commissioners, Kansas City, Mo., was being readied.

The current direction of the project reflects the disclosure elements of National Association of Securities Dealers requirements but also the need for regulators to have more flexibility if a product is unsuitable, says Utah Insurance Commissioner Merwin Stewart, who is heading up the NAIC effort.

For instance, Stewart says there are cases when a consumer will sign off on disclosure because there is trust of an advisor or failure to follow the math and then later it turns out that the product is unsuitable.

The current direction would be to ensure that both insurance and securities regulators have jurisdiction over their respective areas of regulation for variable products, Stewart says.

NASD Notice 99-35 enumerates four points including: gathering information about a client; discussing all relevant facts with a client; making sure information submitted by a client is complete; and, a review to make sure a variable contract is suitable for a client. See

Mike Pickens, Arkansas insurance commissioner and NAIC president, says the suitability model will continue to focus on senior citizens and apply to both fixed and variable annuities.

This issue has been around for four to five years and “it is time to come up with a regulation and vote on something,” he adds. Regulators are hoping to fully adopt a model by the fall NAIC meeting in September at the latest, Pickens says.

All states can point to instances where seniors were sold products inappropriately, he says. “There is a particularly vulnerable class of people,” he continues.

“Congress is also focused on the issue. It wants to know when we are going to do something on suitability and where we are on the issue,” he adds.

The model would also retain the authority of state regulators by establishing provisions to limit private right of actions so that enforcement would be the responsibility of regulators and not the legal system, he adds.

It is quite possible that when the latest draft is released, this could be a breakthrough, says Linda Lanam, vice president and deputy general counsel with the American Council of Life Insurers, Washington.

But, what will be important in determining support is the language for a safe harbor for companies that sell variable products and are already in compliance with the NASD, she adds.

It is important, Lanam says, that there not be duplicative regulation of variable products.

The discussion suggests that both producers and insurers would be responsible for suitability but for different reasons, says Ron Panneton, senior counsel for law and state relations with the National Association of Insurance and Financial Advisors, Falls Church, Va.

Insurers would need a method to ascertain that producers had met a standard and producers would have to meet that standard, and that is encouraging, he adds.

The draft is “moving in a better direction,” says Scott Cipinko, executive director of the Life Insurers Council, Atlanta. For instance, he says LIC supports a private right of action and believes that all regulatory remedies should be exhausted first.

However, he also says it is important that there not be regulatory duplication. Additionally, he maintains that suitability be examined on a case by case basis rather than setting up a system that catches unsuitable sales.

A definition of recommendation, which is broad enough to capture most of the business being conducted, and which was in a draft released in February, is one that is worth keeping, says Kevin Hennosy, publisher of, Kansas City, Mo. That definition needs to be broad enough to meet a marketplace that includes direct sales, he adds.

Reproduced from National Underwriter Life & Health/Financial Services Edition, June 2, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.


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