Congressional committees have proposed changes in suitability standards that, if sustained, could pose a crippling blow to life insurance agents who sell a limited number of investment products.

However, final action on sweeping financial services reform legislation now being considered by Congress is not likely to occur until the first quarter of next year.

On Nov. 10, Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee, and several of his Democratic colleagues, rolled out legislation that would impose a sweeping fiduciary standard on the sale of securities products by insurance agents.

Dodd said he plans to update his discussion draft based on comments, and hopes to have his committee start to mark up his bill on Nov. 17.

According to industry officials, the Dodd bill would also arm the SEC with additional authority to impose stronger consumer protections on sales of investment products to seniors, including insurance products and annuities.

Days earlier, the House Financial Services Committee reported legislation to the House floor by a near party-line vote that agents’ groups say gives the Securities and Exchange Commission the authority to prohibit or restrict any “compensation schemes that are deemed contrary to the public interest.”

The legislation, H.R. 3817, the Investor Protection Act, also contains a provision that directs the SEC to require broker-dealers, their registered representatives, and investment advisors to act in the best interest of a client “without regard to financial or other interests of the broker, dealer, or investment advisor providing the advice,” say officials of the National Association of Insurance and Financial Advisors.

According to Rep. Barney Frank, D-Mass., chairman of the House FSC, floor action on the Investor Protection Act as well as other legislation reforming financial services regulation is not likely until the first week of December.

Under the Dodd bill’s provisions, state securities regulators and state insurance regulators would also be provided with incentives to act to further protect seniors who purchase investment products.

These provisions include a requirement that the SEC police the use of misleading professional designations in the sale of investment products for seniors.

This provision, Sec. 989A of Dodd’s “Restoring American Financial Stability Act,” also proposes to provide grants to states to adopt strong consumer protection and suitability mandates on the sale of annuities and other investment products.

According to Sarah Spear, Association for Advanced Life Underwriting director of policy and public affairs, Sec. 913 of the Dodd bill would require virtually every broker-dealer to register as an investment advisor and adhere to a fiduciary standard.

Under the legislation, the Investment Advisors Act would be amended to simply delete the current exclusion under that law for broker-dealers whose advice is incidental to the conduct of his or her business and who therefore receive no special compensation for such advice.

“This is a more extreme approach than that taken by either the Administration or the House,” Spear says.

“Perhaps most troubling, what started out in the administration’s draft as an effort to provide the SEC with authority to engage in rulemaking to provide for a harmonized fiduciary standard of care, has become, in Dodd’s draft, a significant expansion of the application of the Investment Advisors Act to all broker-dealers, other than mere order takers,” Spear says.

“If enacted in its current form, virtually all AALU members offering variable products will be required to register under the Investment Advisors Act,” she adds.

Tom Currey, NAIFA president, adds, “The Senate Banking Committee draft, if adopted into law, would have huge ramifications for NAIFA members and the way agents and advisors interact with clients or potential clients.

“Any agent or financial advisor licensed as a registered representative because of the sale of variable life insurance, annuities or mutual funds would be confronted with major changes in how they do business,” he says.

Provisions in the investor protection title of the Dodd bill also would change existing standards covering disclosures to clients or potential clients of conflicts of interest, commission compensation, and harmonized examinations for investment advisers, broker-dealers and registered representatives are among the key proposals, Currey says.

“NAIFA backed many positive changes in the House version of this legislation,” he says. “From first reading of the Senate draft, considerable challenges appear to lie ahead if the bill is to reflect the realities of the market place in which agents and advisors work with their clients.”

However, regarding the House bill, Currey says that two provisions specifically concern NAIFA officials.

One would allow the SEC to ban registered reps of broker-dealers from receiving a commission for the sale of variable insurance products or other securities products.

The second would expose registered representatives and investment advisors to increased liability for being compensated for providing personalized investment advice.

“NAIFA has had great success in making improvements to the IPA, but there is still much work to be done,” Currey says. “Our biggest outstanding concern is that the bill will keep the door open for the SEC to ban commissioned-based sales.”