The annuity industry has persuaded all 50 states to update their annuity sales standards.
The New Jersey Department of Banking and Insurance approved an annuity sales regulation Monday that's based on a model update developed by the National Association of Insurance Commissioners. The NAIC tried to design its model update to complement the U.S. Securities and Exchange Commission's Regulation Best Interest requirements.
New Jersey's move means that 49 states have annuity sales rules based on the NAIC model and Reg BI. A 50th state, New York, has even tougher annuity sales rules based on a fiduciary standard of care.
States changed their annuity sales rules quickly to keep the SEC from trying to regulate fixed annuities.
The American Council of Life Insurers and the National Association of Insurance and Financial Advisors, two groups that have supported adoption of the NAIC's model update, said in a statement that they welcomed New Jersey's approval of the regulation, saying it will help consumers get guidance on income planning products from professionals they can trust.
"At a time when millions of workers are nearing retirement without a pension, this kind of certainty matters more than ever," according to David Chavern, the ACLI's president, and Dennis Cuccinelli, a NAIFA trustee.
Advocates of the fiduciary standard approach have questioned whether adoption of a best-interest standard will have much effect on the annuity sales process.
What it means: Annuity users, issuers and advisors throughout the country will soon learn whether the move to a best-interest standard makes a real difference or simply leads to clients filling out different forms.
The best-interest standard: Insurers, annuity sellers, lawyers, courts, regulators and others are still exploring what a best-interest standard really requires.
The general consensus has been that the standard may require annuity sellers to document the reasons for their product recommendations and to describe their compensation but may not require the sellers to give all customers detailed descriptions of their compensation. A best-interest standard seems to let traditional annuity sales commission programs stay in place.
The history: The United States leaves regulation of the business of insurance to the states.
The NAIC is a Kansas City, Missouri-based group that helps state insurance regulators share ideas and resources.
Originally, the NAIC developed an annuity sales "model act," or bill draft, based on a "suitability standard." That required annuity sellers to be able to show that the annuities they were recommending suited the needs of the consumers getting the recommendations.
Some financial advisors and consumer advocates called for all retirement product advice to meet a "fiduciary standard," meaning that advisors would have to be able to show that they had put retirement investors' interests first. Some advocates and critics of a fiduciary standard argued that such a standard would eliminate traditional annuity sales commissions and require that fee-based advisors handle all annuity sales.
The SEC compromised by adopting a "best interest" standard for the products and activities it oversees. The standard requires sellers to be able to show that they have tried to act in the best interest in the consumer when recommending a product or strategy.
In February 2020, the NAIC created a suitability model update based on a best-interest standard. In May 2020, Iowa became the first state to adopt the suitability model update.
The SEC already regulates variable annuities and registered index-linked annuities. Some state regulators said section 989J of the Dodd-Frank Wall Street Reform and Consumer Protection Act could give the SEC a chance to regulate sales of fixed annuities as well as variable annuities and registered index-linked annuities if states failed to adopt a uniform annuity sales standard within five years.
It's not clear how the SEC will interpret the five-year time limit or if the current commissioners would want to move the agency into the business of regulating fixed annuity sales.
Newark, New Jersey. Credit: Shutterstock
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