The Senate last week continued to weigh appropriate standards that agents should use in selling investment products.
As of press time, debate appeared to be drawing to a close on legislation that likely would serve as a future regulatory roadmap for insurance companies and agents.
Agent lobbyists focused on whether the standard mandated by S. 3217, the Restoring Financial Stability Act of 2010, would continue to be suitability or, as demanded through an amendment proposed by two senators, upgraded to the more stringent fiduciary duty.
The bill is sponsored Sen. Christopher Dodd, D. Conn., Chairman of the Senate Committee on Banking, Housing and Urban Affairs.
The suitability-vs.-fiduciary issue was just one of several insurance provisions the industry sought to reshape as the Senate version of financial services reform legislation neared its final form.
As the Senate debated the bill for the second straight week, the plan was for a motion to be offered last Thursday or Friday that would further limit debate on the bill to 30 hours.
If passed, such a move means that a final vote on the bill would occur by Tuesday, May 18.
Another critical issue to the industry was the scope of preemption authority over state rules that would be granted to an Office of National Insurance, which would be created within the U.S. Treasury Department by the legislation.
Insurers were also seeking an exemption from tough regulations mandating that derivatives used to offset interest rate risk be purchased through exchanges.
They were also seeking exemptions from a proposed provision the American Council of Life Insurers, Washington, says would “significantly disrupt investment activities essential to the running of insurance operations for insurers that own banks or thrifts.”
Insurers were also supporting an amendment proposed by four New England senators that would exempt the industry from paying for any of the costs of closing down systemically risky institutions other than insurers.
If the amendment passes, large insurers would still be subject to oversight by the Systemic Risk Council, which would be created by the legislation.
Under the amendment, if a systemically risky insurance company fails, a guaranty fund–not non-insurance financial services firms–would pay the firm’s customers.
An industry lawyer who asked not to be named said the fiduciary issue was the critical one for agents.
He was talking about an amendment to the legislation proposed by Sen. Robert Menendez, D-N.J., and Sen. Daniel Akaka, D-Hawaii. That change would impose a fiduciary standard on the sale of all investment products by broker-dealers, changing current bill language calling for a study of the issue by the Securities and Exchange Commission.
“The big danger [to imposition of the fiduciary standard] is the uncertainty,” the attorney said. “We don’t know what ‘fiduciary’ means in the case of a broker-dealer selling annuities and other hybrid products regulated both at the state and federal level. We just don’t how it might work in this area, creating anxiety for both the practitioner and the agent speaking to a client.”
Moreover, there would be additional costs for compliance and potential liability, he said. Because the liability is unknown, it would lead to increased expenses in D&O coverage.
“And the transition will be expensive, with practitioners and agents having to determine how to comply and what we will need to do to comply,” he said. “The scary part is the day-to-day compliance and the danger of liability, which ties in with the fact we don’t know what the term [fiduciary standard] means in this context.” he said.
The current language in the bill calls for the SEC to undertake a study to determine appropriate obligations of brokers, dealers, investment advisers, and their associates for providing personalized investment advice about securities to retail customers.
The current language would mandate the SEC to provide a report to Congress within 18 months. The amendment would also give the agency the authority to impose new rules dealing with the issue, based on its findings.
But in a letter at mid-week to members of the Senate, the Financial Planning Coalition said criticism of the fiduciary standard was misleading. The coalition noted that members of the industry alleged the standard would drive insurance and brokerage firms out of business and deny investors access to important insurance and securities products.
“Based on our experience, these statements are simply not true,” the group’s letter said. “Those Coalition financial planners who sell insurance and securities products to clients have a track record of successfully doing so under a fiduciary standard of care.”
Mandating a fiduciary standard for the sale of investment products “would not require securities brokers or insurance producers to charge fees for their services,” the letter argued. “The legislation explicitly protects commission-based compensation. Those Coalition financial planners who charge commissions adhere to the fiduciary standard by managing conflicts of interest and disclosing commissions to clients.”
Moreover, mandating use of the fiduciary standard “would not prevent securities brokers or insurance producers from offering a limited menu of products,” the letter said.