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Industry Spotlight > Broker Dealers

NAIFA: IPA Bill Fiduciary Standard Unrealistic

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WASHINGTON BUREAU — The National Association of Insurance and Financial Advisors is trying to change a fiduciary standard provision in a major new financial services reform bill.

The provision, part of the Investor Protection Act of 2009, would apply to sales of securities. It is “so difficult and rigorous” that few NAIFA members could meet it, according to NAIFA, Falls Church, Va.

The full House Financial Services Committee will hold a hearing on the proposed bill Tuesday. The draft, based on an outline sent to the committee in July by the U.S. Treasury Department, was unveiled Thursday by Rep. Paul Kanjorski, D-Pa.., chairman of the committee’s Capital Markets Subcommittee.

Hearing panels will discuss 3 components of the Obama administration’s “capital markets regulatory reform” proposals: investor protection; oversight over private pools of capital; and creation of a National Insurance Office.

Officials say they want the investor protection provisions to eliminate “consumer confusion” about the standard sellers of securities products must use when selling products to consumers, by establishing consistent standards for those who sell financial products to investors.

The investor protection provisions would harmonize conduct requirements; control some sales practices, compensation schemes and other arrangements, and give the U.S. Securities and Exchange Commission authority to prohibit or restrict use of mandatory pre-dispute arbitration in sales contracts, according to an analysis released by Morrison & Foerster L.L.P., San Francisco, a law firm.

Proposed changes in the federal Advisers Act and the federal Exchange Act would authorize the SEC to require that broker-dealers and investment advisors be held to a fiduciary standard.

Under that standard, broker-dealers and advisors would have to “act solely in the interest of the customer or client without regard to the financial or other interest of the broker, dealer or investment adviser providing the advice,” when providing investment advice to retail customers or clients, according to the Morrison & Foerster analysts.

Bruce Maisel of Thrivent Financial for Lutherans, Minneapolis, will represent the American Council of Life Insurers, Washington, at the Financial Services Committee hearing.

NAIFA officials will not get to speak at the hearing.

But NAIFA President Thomas Currey says he wants to make it clear that the proposed IPA fiduciary standard provision is “simply unreasonable and unworkable” from the perspective of NAIFA members.

According to Currey and other NAIFA officials, the Kanjorski version softens the primary thrust of the administration proposal, which called for those people selling securities to do so “solely in the interest of their clients.”

Currey said most NAIFA members earn the predominant share of their livelihood by selling commission-based products.

“They would have difficulty acting ‘solely’ in the interest of their clients,” as proposed by the Obama administration, Currey said.

The Kanjorski draft does take out the word “solely” from the definition, “but the thrust of the problem still exists” in the current form of the legislation, Currey said.

“While our members think we meet the suitability standard, rising to meet the standard of ‘in the interest of clients’ is so rigorous most of our members could not meet it,” he said.

It is NAIFA’s view that, under this interpretation “our members would be required to get bids from every insurance company or face legal liability,” Currey said.

Today, many NAIFA members use when suitability standard when they are selling commission-based insurance products, and they abide by a different, tougher standard when they are acting as investment advisors or as fee-only planners, Currey said.

Currey said NAIFA strongly supports legislation that would reduce consumer confusion as to the legal responsibility of the individual selling them a securities product.

But “we want to make sure that any legislation preserves the ability of our members to sell the products of the investment companies and broker-dealers they represent,” Currey said.

Currey noted that NAIFA members have contractual relationships with the companies and broker-dealers they represent.

“If you violate the ‘selling-away’ rule, you breach the contractual arrangement,” Currey said. “This is critical and goes to the core of how members do business.”

Changing the rules “would truly upend our business if it became law,” Currey said.

That kind of change would affect the agency employees as well as the agencies, he said.

NAIFA also is opposing the imposition of any restrictions on members’ manner and type of compensation.

“We serve a middle and lower income market that just doesn’t have the resources to pay up front” for financial services advice,” Currey said.

NAIFA does support Kanjorski draft provisions that require sellers to tell clients about the differences between investment advisors and broker-dealers.

But “we think that no matter what standard is established in this process, bad actors will continue to violate any standard that is put forth,” Currey said.


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