This week will tell whether the insurance industry has been able to persuade the House Financial Services Committee that a proposed “one-size-fits-all” fiduciary standard governing the sale of securities products will have what some agent groups fear would be a dire impact on the current distribution system for insurance products.

Officials of the Association for Advanced Life Underwriting and the National Association of Insurance and Financial Advisors are voicing deep concern about the proposed language.

Thomas Currey, NAIFA president, says the legislation as proposed is “simply unreasonable and unworkable” from the perspective of NAIFA members.

The language contained in a draft of the proposed Investor Protection Act of 2009 would impose a fiduciary standard on the sale of investment products.

This problem is particularly acute in the case of AALU members and other life insurance agents, who are registered representatives, affiliated with broker-dealers. They focus almost exclusively on recommending suitable life insurance products–both securities and non-securities to address customers’ financial needs related to death or retirement, says Sarah Spear, AALU director of policy and public affairs.

These life insurance agents provide the security that 75 million American families rely on, Spear says, and they are compensated almost exclusively by life insurance companies based on sales. They have the extremely difficult job of helping people to face their financial needs, and make sacrifices to set aside funds to address those needs. Approximately 40% of Americans currently do not have life insurance coverage. Layering on a set of unworkable fiduciary standards will exacerbate this problem, Spear says.

But an official of the American Council of Life Insurers is cautiously optimistic that the proposed language that so concerns the industry can be successfully amended before the bill is reported out by the committee. Such a vote is likely to occur this week, the ACLI official says.

The draft legislation as proposed by Rep. Paul Kanjorski, D-Pa., chairman of the Capital Markets Subcommittee of the FSC, would harmonize the standard that sellers of securities products must use when they sell products to consumers to a fiduciary standard.

This standard, as proposed in the legislation, would require producers to act in the “best interests of the customer” when selling investment products.

Currently, consumers have the choice of paying a fee to retain a registered investment advisor on a fiduciary basis to help them with their needs, or utilizing the services of a broker-dealer, who does not charge a fee, but is compensated by securities commissions upon sale of a suitable product to the consumer, the so-called “suitability standard.”

In its comments to the committee, NAIFA officials say they have “strong reservations” about creating a new fiduciary duty standard and “urge you to take steps to ensure that statutory and regulatory changes do not have the effect of restricting the ability of investors to get the advice and service they need to competently engage in the marketplace.”

And the AALU has submitted alternative language, arguing that a “one-size-fits-all” application of a fiduciary standard on sale of securities products would limit access to investment services.

Its approach would mandate “differentiation,” rather than “harmonization” of the roles and responsibilities “of distinct types of professionals in the marketplace.”

In a letter submitted to the panel, AALU CEO David Stertzer says, “It is critical that regulatory reform does not create artificial barriers which interfere with the ability of life insurance producers to help consumers.”

In its comments, the AALU says broker-dealers typically provide lower-cost access to the investment marketplace for middle-income customers, as they are primarily compensated on a commission basis from securities manufacturers, rather than through fees paid directly by customers. “With appropriate disclosure, customers can benefit from the cost dynamics of this model,” the AALU says.

“Not everyone wants to pay higher costs simply to execute a stock trade or be forced into a ‘fee-only’ advisory arrangement with an RIA, but such circumstances are likely to result from the imposition of a fiduciary standard across the board and heightened litigation and compliance risks associated with providing ‘best’ advice or recommendations,” the AALU says in its statement to the committee.

As a result, the AALU suggests legislation that would create clear separation between the roles of those who sell securities, broker-dealers, and those who provide investment advice, registered investment advisers.

Specifically, the AALU suggests that as an alternative, the legislation mandate:

–Increasing disclosures to investors from both RIAs and B-Ds to ensure that investors understand the respective roles and duties of each.

–Imposing strict fiduciary standards on those who are retained exclusively by customers to provide investment advice (RIAs).

–Increasing statutory duties of those who sell (B-Ds), to ensure securities products offered are suitable to the overall objectives, financial status, risk-tolerance, and other needs of the customer.

–Ensuring compliance through required annual examinations of B-Ds and RIAs.

NAIFA’s Currey, president of PDC Financial Services in Grand Prairie, Texas, explains that most NAIFA members earn the predominant share of their livelihood through commission-based products, and contends the original proposal would have profound consequences on NAIFA members.

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

Currey says 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.

“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 says.

For example, Currey says, 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.”

Currently, 80% of NAIFA members use their certified financial planner designation, which mandates the higher fiduciary standard, when they are acting as an investment advisor or a feel-only planner, Currey says.

However, when “they are selling insurance products, they have to meet the lower suitability standard,” he adds.

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

But, he says, “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.”

For example, he says, “Our members have contractual relationships with the companies and broker-dealers” they represent.

Currey explains that “if you violate the ‘selling-away’ rule, you breach the contractual arrangement. This is critical and goes to the core of how members do business. It would truly upend our business if it became law.”

And, he says, “it would impact both the agencies and the agency employees.” Moreover, he adds, “we also don’t want any restrictions on our members’ manner and type of compensation.”

He emphasizes that this impacts both the agent and the customer. “We serve a middle and lower income market that just doesn’t have the resources to pay upfront for financial services advice.”

Currey says the Kanjorski draft proposes language that would call for simple disclosures to the client about different roles between investment advisers and broker-dealers.

He says one reason momentum has grown for the legislation are the investment frauds perpetrated by Bernie Madoff and Allen Stanford.

“We are strong supporters of a disclosure provision,” he says. “We think that no matter what standard is established in this process, bad actors will continue to violate any standard that is put forth.”

David Leifer, an associate general counsel at the American Counsel of Life Insurers, says, “The potential impact would be difficult to quantify.”

He says that as currently drafted, the provision “has the potential to have a significant negative impact on the industry,” particularly for proprietary products and distribution channels.

“But I would not paint as dire as others groups have done,” he adds.

For example, “we have seen some movement in the latest draft from Rep. Kanjorski and ultimately from the House Financial Services Committee staff. As a result, “we are cautiously optimistic that we are going to make additional progress.

“We hope to have a final draft on compromise legislation and committee action this week,” he says.

ACLI is working with the committee staff and keeping in touch with NAIFA, AALU and the Securities Industry and Financial Markets Association. SIFMA members support the current language, although they have other problems with the proposed bill, Leifer says.

“We have a different take on this than AALU and NAIFA, but we want to get to the same place as they do in protecting consumers and preserving existing distribution channels that serve the public well today,” Leifer says.

The legislation as proposed would also impose limitations on certain sales practices, compensation schemes and other arrangements, and give the Securities and Exchange Commission authority to prohibit or restrict use of mandatory pre-dispute arbitration in sales contracts.

It is part of a large package of financial services regulatory reform measures the House is taking up.

In comments last week, Rep. Stenny Hoyer, D-Md., House majority leader, said the current schedule is for the House to take up the entire package by mid-November.

Similar legislation is being drafted in the Senate Banking Committee, and is expected to be unveiled as a bipartisan package later this month.

But the bills will take different forms. The House is acting on the bills separately. For example, last week the Financial Services panel took up three pieces of its package, the Over-the-Counter Derivatives Markets Act, the Consumer Financial Protection Agency Act, the Fair Credit Reporting Act, and the Expedited CARD Reform for Consumers Act.

The Senate panel is expected to come up with one piece of legislation, supposedly with 13 titles.