Many observers are assuming that the U.S. Securities and Exchange Commission’s Regulation Best Interest proposal would be easier on life insurance agents and brokers than some states’ tough fiduciary rule, best interest and suitability measures might be.
But, in the real world, the SEC’s Regulation BI might be tougher on agents than expected, because the courts might focus purely on the text of Regulation BI itself, and ignore SEC supplementary materials that appear to soften the effects of Regulation BI, according to a lawyer who is helping state insurance regulators analyze the U.S. Securities and Exchange Commission’s Regulation Best Interest proposal.
Douglas Schmidt, a partner at Husch Blackwell LLP in Kansas City, Missouri, told state insurance regulators recently, in a memorandum dated March 31, that how the courts read Regulation BI could depend on how clear, or fuzzy, they think the term “best interest” is.
Commissions and Captive Agents
If the courts thought “best interest” was a vague term, they might use the SEC’s supplementary materials to figure out what the SEC meant, Schmidt writes in the memo, which was prepared for the National Association of Insurance Commissioners (NAIC).
SEC officials have suggested in the supplementary materials that, in the age of Regulation BI, there would not necessarily a single best product recommendation. Schmidt says.
SEC officials have also suggested in the supplementary materials that use of commission-based sales compensation arrangements, and “captive” agents, would still be possible, Schmidt says.
A captive agent can recommend only products issued by one or more specified companies.
But, Schmidt writes, if the courts believed that the term “best interest” had a “plain and ordinary” meaning, they might look solely at Regulation BI itself, without using the supplementary materials.
“In this scenario, a court may conclude that the ‘best’ recommendation really is required, regardless of the SEC’s proclamation in supplementary material that Regulation Best Interest does not require the single ‘best’ recommendation,” Schmidt writes. “The broker-dealer would be required to show it was reasonable to believe that the recommendation was best.”
Schmidt says he and Husch Blackwell colleagues believe the no-supplementary-materials scenario is a likely scenario.
“Although it is a close call, we believe that a court would hold that Regulation Best Interest as it stands today is unambiguous, and would find that the term ‘best interest’ has a plain and ordinary meaning,” Schmidt writes.
The Regulation BI Effort
The SEC has been drafting Regulation BI in an effort to address concerns about financial services products sales standards, in response to the end of the U.S. Department of Labor’s first major effort to develop a fiduciary rule standard for the sale of retirement savings products.
The SEC has not defined “best interest” in Regulation BI.
SEC officials have given some ideas about what they mean by “best interest” in the supplementary materials that go along with Regulation BI.