State insurance regulators now have a new guide they can use to help them apply new annuity sales rules.
The Life Insurance and Annuities Committee, an arm of the National Association of Insurance Commissioners, approved an Annuity Suitability Safe Harbor Guidance document at a recent session in Hollywood, Florida, at the National Association of Insurance Commissioners' fall national meeting.
The committee's move to adopt the guidance put the guidance into effect. State insurance regulators can use the guidance to oversee annuity sellers using an approach that might be somewhat more strict than the old suitability approach but might be somewhat looser than requiring annuity sellers to meet a fiduciary standard.
What it means: State oversight of annuity sales efforts could change.
States might require advisors and agents to look at a wide range of retirement savings options before recommending an annuity, document the reasoning behind their recommendations, work harder to avoid potential compensation-related conflicts of interest and give customers more information about their compensation.
The backdrop: The United States leaves regulation of the business of insurance to the states.
The NAIC helps state regulators share ideas about regulation. It cannot normally set state insurance rules directly, but states often start with NAIC models when developing their rules.
The NAIC has been using a model that set a "suitability" standard for annuity sellers. The sellers were supposed to be able to show that the annuities they recommended to customers suited those customers' needs.
Financial planners, consumer advocates and others have called for a move to a "fiduciary" standard, or rules requiring annuity sellers to show that they had put the customers' interests first and had tried to avoid conflicts of interest. In practice, a fiduciary standard might eliminate annuity sales commissions and could expose annuity recommenders to lawsuits if the products they recommend underperform other products.
The U.S. Securities and Exchange Commission reacted by adopting Regulation Best Interest. Reg BI requires advisors to show that they are acting in the best interest of the customers. It appears to require advisors to document the thinking behind their recommendations and make conflict-of-interest disclosures without necessarily banning sales commissions or, apparently, exposing the advisors to the kind of lawsuit risk associated with a fiduciary standard.
The NAIC developed an update of its annuity sales suitability model that's designed to complement the SEC's Reg BI.
The Life Insurance and Annuities Committee's Annuity Suitability Working Group developed the new guidance to help regulators use the Reg BI-influenced suitability model update.
The safe harbor: The safe harbor guidance will help insurers know if they are clearly overseeing annuity sales, and working with outside individuals and entities, in a way that meets the NAIC's new best interest standard.
The outside entities could include broker-dealers or other entities that are supervising the people who sell the annuities.
To qualify for the safe harbor, insurers are supposed to show that they are actively monitoring the supervising entity and giving the supervising entity enough information to oversee the agents effectively.
An annuity issuer could use supervision by an entity that's applying the SEC Reg BI or U.S. Department of Labor Employee Retirement Income Security Act fiduciary standard to meet NAIC best interest standard requirements, but only if the supervising entity addresses the features of annuities and takes care to look at matters such as guarantees and surrender charges.
The annuity issuer must have periodic engagement with the supervising entity, and the issuer is supposed to use audits and other means to keep tabs on the supervising entity.
Legal analysts at Carlton Fields say the new guidance raises new questions. They want to know, for example, "what constitutes periodic engagement with the supervising entity."
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