In an industry looking for consistency in regulations, one state could be considered an outlier, but two states is a trend.
And that is why some insurers and producers are alarmed by a fiduciary proposal in Massachusetts. The industry had long ago written off New York — which approved tough best-interest standards in 2018 — as a liberal state with the leverage to enact tough regulations.
After all, Wall Street isn’t moving from Manhattan.
The plan all along was to push out best-interest standards through the National Association of Insurance Commissioners that all the remaining states could adopt.
“I think that we will end up in a good place with the 49 states,” Iowa Insurance Commissioner Doug Ommen said at the NAIC summer meeting in August.
Then Massachusetts put forth its proposal, which would impose a uniform fiduciary conduct standard on broker-dealers, agents, investment advisors and investment advisor representatives providing financial advice to any clients in Massachusetts.
If the rules become law, financial recommendations and advice must be based on “what is best for the customers and
clients, without regard to the interests of the broker-dealer, advisory firm and its personnel,” Secretary of the Commonwealth William Galvin has said.
While the fiduciary proposal came from the Massachusetts Securities Division, which would seem to exclude insurance products, some industry observers are skeptical.
Some aspects of the rule would appear to cover insurance products if sold as part of a sales quota or bonus award, said Larry J. Rybka, chairman and CEO, Valmark Financial Group.
Industry trade associations coordinated an opposition response during a public hearing last month in Boston. Some said the rule was so punitive that firms might stop doing business in Massachusetts.
Massachusetts Gov. Charlie Baker, a Republican, joined the fray, releasing a letter calling on Galvin, a Democrat, to rescind the fiduciary proposal. Baker echoed concerns that the rule will cause confusion in the industry and conflict with other regulations.
The Securities Division will consider all public comments, said a spokeswoman for Galvin. But Baker does not have an official role in the regulatory process, she added.
Regulators will next go through the comments received with no clear timeline for the next step, but the process has moved quickly to date.
Meanwhile, industry representatives are holding out hope for nationwide rules authored by the NAIC and the Securities and Exchange Commission. Both are nearing completion.
If the Massachusetts fiduciary rules are adopted, the commission-based model might go the way of the dinosaur, said Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors.
“This likely shift by many broker-dealers and their reps from a commission-based model to a fee-based practice will have a costly, negative effect on many of the small and midsized investors,” Mayeux said at the public hearing.
Embracing Best Interest
For producers and distributors, harmonization of rules took precedence in 2019. In the spirit of true negotiation and compromise, the industry largely embraced a best-interest standard in the hopes of achieving consistent regulations across states and regulatory bodies.
For annuity sellers, the NAIC model law is the vehicle of hope.
On Dec. 30, the NAIC Life Insurance and Annuities (A) Committee voted 11-1 to approve the annuity sales standard. New York cast the No vote.
New York adopted its own tough standards that took effect for annuity sales on Aug. 1, 2019, and for life insurance sales on Feb. 1, 2020. New York regulators have repeatedly pushed the NAIC for tougher annuity rules and to cover life insurance sales as well.
NAIC regulators mostly dismissed New York’s suggestions. The model articulates a best-interest standard through the following four obligations: care, disclosure, conflict of interest and documentation.
The new regulations will commit the agent to extra work and documentation to establish the consumer’s profile. Agents will need to find out and document things like a consumer’s financial situation, insurance needs and financial objectives.
The rule specifically does not establish a fiduciary duty, nor does it ban agents from recommending products with a higher compensation structure. But the agent must be able to show that such a recommendation is in the consumer’s best interest.
All that remained as of press deadline was for the NAIC Executive Committee and Plenary to vote on the model, which appears to be a mere formality. The rules would then go to the states for adoption.
Jason Berkowitz, chief legal and regulatory affairs officer for the Insured Retirement Institute, predicted that many states will be eager to adopt the new annuity model, while some others will come along relatively quickly.
“We’ll be pushing for this to be adopted across the country,” he said in December. “I think you will see an early rush of states that will want to get out on this quickly.”
When it is formally adopted, the new NAIC annuity model is expected to harmonize well with the impending best-interest regulation drawn up by the SEC, as well as what is expected from the federal Department of Labor.