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The FIO Report: What it says about annuities

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The U.S. Treasury’s Federal Insurance Office (FIO) long-awaited report on how to modernize the industry was finally released last week, all 70-some pages of it.

For those in the annuity industry, the pertinent section begins on page 51, although much of what it says will sound familiar. On that page and the next, the FIO recommends that all states enact the NAIC Suitability in Annuities Transaction Model Regulation. More that 20 states have adopted the model act, with the remaining states given until June of this year to do the same.

The FIO report states that if all states fail to adopt the NAIC model act and national uniformity is not achieved, “federal action may become necessary.” However, it does not specify what that action would be and the report itself has sparked a fierce debate over which takes precedence in the insurance industry: state or federal control.

Nevertheless, the brief mention of annuities does reiterate what the model act outlines as requirements for a suitable sale of an annuity, starting with one in which the agent has “reasonable grounds” for believing the recommendation to purchase an annuity is suitable for the client. Producers must also be trained on annuity provisions. Carriers, meanwhile, are required to review each recommendation to determine suitability before issuing the annuity. The model act further provides a safe harbor for variable annuity sales made in compliance with FINRA requirements.

Indexed annuities were discussed as well. Harkening back to the 151A debate, which ultimately exempt indexed annuities from securities law, the FIO report noted that the Dodd-Frank Act directs the SEC to consider indexed annuities as a nonsecurities product provided they meet certain conditions, such as if the value of the indexed annuity does not vary according to the performance of a separate account; and if it satisfies state nonforfeiture law or similar regulations found in the NAIC Model Standard Nonforfeiture Law for Life Insurance or the NAIC Model Standard Nonforfeiture Law for Individual Deferred Annuities. To be exempt as a securities, the indexed annuity must be issued in a state that has adopted the NAIC model annuity suitability act or by an insurer that employs sales practices that “meet or exceed” the NAIC model act on a nationwide basis.

There was a bit of a carrot for states to adopt the NAIC model act. Under the Dodd-Frank Act, the Office of Financial Literacy in the Consumer Financial Protection Bureau is authorized to bestow grants to states to help protect seniors from “misleading and fraudulent sales” of financial products. However, to apply, one of the stipulations would be that state regulators enact strong suitability standards.

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