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July 12, 2010 at 08:00 PM
Conforming to a fiduciary standard on the sale of investment products will be the first hurdle the insurance industry will have to face if sweeping financial services reform legislation is passed by Congress when it returns from the Independence Day recess on July 12.
The legislation is H. 4173, now known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. It creates a Federal Insurance Office and a system to wind down troubled large institutions, and impacts industry investment and hedging activities. A key provision of this legislation imposes a fiduciary standard on the sale of investment products, such as annuities, mutual funds and other financial planning products. The House approved the measure on June 30 and the Senate is expected to vote on it.
An industry lawyer in Washington who asked not to be quoted by name because his firm is still drafting its interpretation of the fiduciary provision in the legislation, Sec. 913, said that the fiduciary standard ramps up legal liability for agents and broker-dealers, as well as the potential regulatory liability. “If it works the way it is designed, it is going to make it easier for a regulator or a customer to complain after the fact that a transaction was inappropriate,” he cautioned.
He also said that to put this in perspective, “In the past, agents and brokers had to meet a suitability hurdle. Now they will have to meet fiduciary standard/best interest of the client standard.”
He called the proposal “oddly crafted,” in that it requires the SEC to prepare a study within six months, which then gives the agency the power to draft a rule based on the findings of the report.
But, he said, Section 913 also includes a separate, independent grant of rulemaking authority to the SEC related to the fiduciary duty issue.
He said one of the provisions the SEC can put into a regulation is that all broker-dealers “will have to provide disclosure of material conflicts of interest. To the extent that a fee represents a potential conflict of interest, it may have to be disclosed.”
He also said that while the NAIC just developed a new model law on suitability, the SEC provision once again forces state insurance regulators to play catch-up to changing federal requirements.
Tom Currey, president of the National Association of Insurance and Financial Advisers, responded, “The SEC has to consult the study and we look forward to providing our input as they conduct the analysis required in the bill.”
