The National Association of Insurance Commissioners is getting closer to a final showdown over an annuity sales standards proposal that could help state insurance regulators create a defense against federal sales standards proposals.
Members of the NAIC’s Life Insurance and Annuities Committee today approved proposed revisions to the NAIC’s Suitability in Annuity Transactions Model Regulation, or Model Regulation Number 275, during a conference call meeting.
The vote tally was not immediately available.
The proposed suitability model revision would require agents, brokers and others selling annuities to act in the best interest of the consumer, and to disclose potential conflicts of interest.
An annuity seller would have to try to get more detailed information about an annuity shopper’s finances, to make sure that the products recommended would fit the consumer’s needs.
But the proposal would let producers continue to use commission-based compensation arrangements.
Bruce Ferguson, a senior vice president at the ACLI, put out a statement welcoming the NAIC committee’s approval of the model revision proposal.
“This important proposal will significantly enhance protections for Americans planning and saving for the future,” Ferguson said in the statement. “Retirement savers should be confident that financial professionals are acting in the best interest of consumers. The proposal the committee approved today achieves this goal and will be more effective than individual state fiduciary proposals that miss the mark on protecting consumers.”
The NAIC’s plenary — the body that includes all voting members of the NAIC — still must approve the proposed model revisions before they can take effect.
The NAIC is a Kansas City, Missouri-based group for insurance regulators. The group has no direct ability to create state insurance laws or regulations, but states often start with NAIC models when developing insurance laws and regulations.
In recent years, the U.S. Department of Labor, the U.S. Securities and Exchange Commission, and state insurance and securities departments have crowded onto the NAIC’s annuity suitability model turf, by proposing fiduciary rule sales standards and best interest interest standards.
Groups like the American Council of Life Insurers (ACLI) and the National Association of Insurance and Financial Advisors (NAIFA), and some state insurance commissioners, have suggested that an updated NAIC model could help shield life insurers and financial professionals against federal or single-state proposals that might ban use of commissions, or expose financial professionals to more litigation risk.
Members of the Life Insurance and Annuities Committee came close to approving the model revision earlier this month, at an in-person NAIC meeting in Austin, Texas. They put off final approval because of commenters’ concerns about two model forms.
One model form is supposed to help financial professionals summarize what they’ll be doing for a client.
The other model form is supposed to help financial professionals deal with clients who are unwilling to provide some or all of the information needed for a full suitability review process.
Ferguson, the ACLI senior vice president, said the ACLI believes the proposal provides a clear, objective best interest standard for annuity recommendations, and that the standard aligns well with the SEC’s Regulation Best Interest standard.
Gary Sanders, a NAIFA vice president, has expressed concerns about the language in the proposed producer role disclosure form.
Form drafters suggested that producers could describe what they do by marking checkboxes.
Sanders told the Life Insurance and Annuities Committee that NAIFA wants the form to state that the annuity producer is licensed to sell annuities, and to recommend that the consumer ask the producer what else the producer is able to sell.
Sanders also asked for changes in language explaining who pays a producer’s fees or commissioners, to avoid giving the consumer the impression that, in some cases, the consumer has nothing to do with paying the agent.
The Center for Economic Justice has argued from the beginning that the suitability model update proposal relies too much on disclosure requirements and makes too little use of restrictions on what producers are allowed to do.
The center says in comments on the compensation disclosure form, and on the form for consumers who decline to provide all requested information, that it also has concerns about the proposed model disclosures themselves.
The disclosure form drafters have not identified the consumer protection purpose of the disclosures, have failed to hire consumer disclosure drafting experts, have failed to use easy-to-understand language, and have failed to test the proposed disclosures on consumers, the center says.
The NAIC’s Plenary
The center’s objections raise the possibility that the model update proposal could run into turbulence when it reaches the NAIC’s plenary.
The proposal could end up getting support from regulators from the states that tend to be more accommodating to insurers, and opposition from regulators from states like California and New York.
Links to comments about the version of the suitability model update that came up at the Life Insurance and Annuities Committee meeting today are available here, under the Related Documents tab.
— Read What If Annuity Prospects Hate All Those Questions?, on ThinkAdvisor.