Minnesota, South Carolina Adopt NAIC-Backed Annuity Sales Standards Update

What You Need to Know

South Carolina was the 24th to adopt the NAIC update and Minnesota the 25th.
State insurance regulators now have the authority to regulate non-variable annuities.
North Carolina could adopt the update later this month.

Two more states — Minnesota and South Carolina — have adopted an annuity sales standards update created by the National Association of Insurance Commissioners.

Michael Wise, the acting South Carolina insurance director, and the South Carolina Department of Insurance adopted a regulation to enact the change, publishing Document Number 5065 in the South Carolina States Register.

Minnesota lawmakers had to make the change in their state by passing a bill, SF 4108. The bill passed 66-0 in the state Senate and 129-4 in the state House.

Regulators at the NAIC intended for the update to be compatible with the U.S. Securities and Exchange Commission’s Regulation Best Interest.

What It Means

State insurance regulators now have the authority to regulate non-variable annuities, including traditional fixed annuities and non-variable indexed annuities.

Some regulators have suggested that the Securities and Exchange Commission could use a provision in the Dodd-Frank Act to preempt state oversight of state annuity sales if states fail to move toward adopting the NAIC update.

The new adoptions appear to increase the odds that states will be able to defend their authority to regulate non-variable annuity sales, without having to share jurisdiction with the SEC.

The History

The Employee Retirement Income Security Act of 1974 calls for retirement plan advisors to meet a fiduciary standard.

During the administration of former President Barack Obama, the U.S. Department of Labor adopted a fiduciary rule regulation and related guidelines that could have imposed a fiduciary rule on annuity sales, prohibited use of sales commissions in connection with annuity sales, and imposed onerous restrictions on sales of non-variable indexed annuities.

During the administration of former President Donald Trump, the department declined to defend the fiduciary standard regulation against legal attacks, and the regulation died in court.

The SEC replaced the fiduciary standard with Regulation Best Interest, a regulation that requires annuity sellers to act in a consumer’s best interest but appears to allow use of sales commissions.

The States

South Carolina was the 24th to adopt the NAIC update and Minnesota the 25th.

North Carolina appears to be on track to adopt the update later this month, according to the American Council of Life Insurers and the National Association of Insurance and Financial Advisors.

Hawaii state lawmakers passed an amended suitability bill, HB2111, and sent it to David Ige, the state’s governor, on May 4. Ige, a Democrat, has not yet signed or vetoed the bill. If Ige does not sign or veto the bill by July 12, it will become law.

The ACLI and NAIFA have emphasized the need for states to adopt the same version of the sales standards update, to reduce the risk that the SEC will preempt state oversight. Hawaii lawmakers ended up amending the original text of their update bill to include implementation date changes, proposed by the ACLI and supported by NAIFA, before approving the final version of the bill.

Insurance Groups’ Reactions

The ACLI and NAIFA have argued that banning use of commissions in annuity sales will hurt middle-income consumers by limiting sales of annuities to consumers who are unwilling or unable to pay separate advisory fees to fee-based advisors.

The groups put out joint statements celebrating Minnesota’s and South Carolina’s adoptions of annuity suitability standard updates.

The groups said that an analysis has shown that a fiduciary-only approach could cut the savings of 3 million people by a total of $140 billion.