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Regulation and Compliance > Federal Regulation

10 Key Regulation Best Interest Points, for Agents

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The U.S. Securities and Exchange Commission (SEC) has tested life and annuity policy specialists’ speed reading skills by posting a final version of its Regulation Best Interest (Regulation BI) regulations.

The regulation packet — which includes he introduction to the regulation, federal regulators’ economic impact assessments, and the actual text — takes up 771 PDF file pages.

(Related: Life and Annuity Groups Give SEC’s Final Best-Interest Standard Mixed Reviews)

SEC members approved the text by a 3-1 vote Thursday. Regulation BI is set to take effect 60 days after its official Federal Register publication date.

The original version of the regulation was released last summer. Many insurance groups’ policy people welcomed the SEC’s work on the project, and the likelihood that the SEC’s sales standard will be easier for insurers, distributors, and retail financial professionals to handle than a wave of dozens of different state-imposed sales standards would be. But they acknowledged that they’re still analyzing the final text.

Here are 10 points we found that might be of interest to agents, brokers and others who help clients buy life insurance policies and annuities.

1. Disclosing what exactly you’ll do for a client is important.

A broker-dealer can decide that it will sell only its own, proprietary products, or products from certain companies, and specific affiliated advisors may have limitations on what they can sell, officials say.

But the broker-dealer and associated persons must tell a retail customer about those limitations, because those are ”material facts relating to the scope and terms of the relationship,” officials say.

2. If you say you’ll do something for a client, you’d better do it.

SEC officials note several times that the National Association of Insurance and Financial Advisors (NAIFA) suggested that broker-dealers should be able to set the terms of their relationships with clients, and that, for example, broker-dealers should be able to agree to whether they will provide specific services, such as portfolio monitoring services.

Broker-dealers can decide whether they will agree to offer services such as monitoring services, but, if they tell clients they will offer such services, then Regulation BI protections will apply, officials say.

3. Standardized compensation disclosure notices should be fine.

Regulation BI sets no specific restrictions on use of sales compensations or other forms of compensation. It does require that broker-dealers use written policies and procedures to identify and disclose on material limitations on their investment recommendations, and any conflicts of interest, officials say.

A broker-dealer must try to reduce the possibility that the conflicts of interest will lead to the broker-dealer making recommendations that put its own interests ahead of the interests of the retail customer, officials say.

A broker-dealer can satisfy the disclosure obligation by using standardized documents, such as a product prospectus, relationship guide, account agreement or fee schedule, officials say.

4. Incentive travel should be fine.

Under Regulation BI, a broker-dealer cannot use sales contests, sales quotas, bonuses or other non-cash compensation to “create high-pressure situations to sell a specifically identified type of security… within a limited period of time, such that the associated person cannot make a recommendation in the retail customer’s best interest,” officials say.

A broker-dealer does need to develop written policies and procedures to keep any sales incentives programs from putting the firm’s interests ahead of those of the customers, officials say.

But a broker-dealer that focuses on selling proprietary products, and discloses that limitation, can promote “the sale of such products through its compensation practices, so long as the incentive is not based on the sale of specific securities or types of securities within a limited period of time,” officials say.

A broker-dealer can use incentive programs based on total sales, asset growth, asset accumulation, or customer satisfaction, officials say.

5. High-net-worth people can be retail customers, too.

The Financial Industry Regulatory Authority (FINRA) excludes high-net-worth individuals from its definition of retail customer.

The SEC has declined to follow FINRA’s example.

“We believe conflicted recommendations can also result in harm to high net-worth individuals,” officials say in the Regulation BI preamble. “We believe the benefits of Regulation Best Interest justify compliance costs as these individuals could benefit from the protections included in Regulation Best Interest regardless of their net worth, which may not necessarily correlate to a particular level of financial sophistication.”

6. Health accounts count.

Officials say, in a footnote in the Regulation BI preamble, that the new sales standard applies to any “natural person” who is seeking help with a retirement savings arrangement, such as a 401(k) plan account, or a 403(b) plan account, or who is “seeking brokerage or advisory services for other tax-favored savings arrangements.”

The SEC explicitly lists the following types of arrangements as “other tax-favored savings arrangements”:

  • Archer medical savings accounts.
  • Health savings accounts.
  • Other tax-favored health plan arrangements.
  • Coverdell education savings accounts.
  • 529 education savings plans.

7. Rollovers count.

Under Regulation BI, recommending that a retail customer move assets from one type of arrangement, such as 401(k) plan, to another type of arrangement, such as an individual retirement account, is a recommendation.

8. You don’t have to be prudent.

Originally, Regulation BI was going to state that broker-dealers and associated persons should exercise prudence, and “exercise reasonable diligence, care, and skill.”

The SEC deleted the term “prudence” from the final version of the regulation, in part because a commenter from Transamerica argued that the term “prudence” is associated mainly with the Employee Retirement Income Security Act, not with federal securities laws, and that keeping the term in the final Regulation BI could lead to confusion.

9. You do have to behave in a way equivalent to being prudent.

Regulation BI will still require you to exercise reasonable diligence, care, and skill.

10. It’s possible that Regulation BI could go away.

The U.S. Department of Labor completed work on a fiduciary rule regulation and a large collection of implementation guidelines.

The federal courts ended up blocking implementation of the Labor Department’s fiduciary rule, with the blessing of the administration of President Donald Trump.

SEC officials say, in a footnote in the Regulation BI preamble, that the American Council of Life Insurers (ACLI) called for the SEC to put the current version of Regulation BI through a new public comment period if the current version was more restrictive than the original version.

The ACLI has welcomed SEC approval of the current version of Regulation BI, and SEC officials say they do not believe that a new comment period is necessary. But it’s possible that an entity unhappy with the final version of the regulation could use the lack of second public comment period, or some other ground, to keep the final version from being implemented.


Links to Reg BI resources are available here.

— Read SEC’s Clayton Explains ‘Best Interest’ vs. ‘Fiduciary’ Duty, on ThinkAdvisor.

— Connect with ThinkAdvisor Life/Health on FacebookLinkedIn and Twitter.


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© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.