Potential Revisions to the Suitability in Annuity Transactions Model Regulation (#275)

April 27, 2018

Submitted Electronically to jmatthews@naic.org

The Honorable Dean Cameron
Director, Idaho Department of Insurance
Chairman, NAIC Annuity Suitability (A)
Working Group
700 West State Street, 3rd Floor
Boise, Idaho 83720-0043

The Honorable Doug Ommen
Commissioner, Iowa Insurance Division
Vice Chairman, NAIC Annuity Suitability (A)
Working Group
Two Ruan Center
601 Locust, 4th Floor
Des Moines, IA 50309-3738

Re:      Potential Revisions to the Suitability in Annuity Transactions Model Regulation (#275)


Dear Director Cameron and Commissioner Ommen:

The undersigned organizations (collectively, the “Industry Groups”) appreciate the opportunity to provide these comments in response to the request by the National Association of Insurance Commissioners (“NAIC”) Annuity Suitability (A) Working Group (the “Working Group”) for comments regarding potential revisions to the Suitability in Annuity Transactions Model Regulation (#275) (the “Suitability Model”) to “establish a best interest/consumer-focused approach and/or process for the sale of annuity products to consumers.”1

The Industry Groups commend you and the Working Group for recognizing the importance of this issue and for seeking public input to help the NAIC as it considers whether and how to amend the Suitability Model to establish an enhanced standard of conduct for insurance producers and insurers when making annuity recommendations to individual consumers.2 The vast majority of producers already act in their clients’ best interest when providing personalized recommendations, and the Industry Groups have long supported the principle that financial professionals3 should be required to meet this standard.

At your request, the Industry Groups have undertaken an effort over the past 30 days to reach consensus on general principles or specific revisions to the Suitability Model to achieve this goal. The result of those efforts is set forth in this letter, including a partial markup of the Suitability Model (attached as Appendix A) and a set of guiding principles (attached as Appendix B) reflecting points on which the Industry Groups have tentatively reached consensus as of the date of this letter. The Industry Groups intend to continue our review of these matters and will endeavor to provide additional comments regarding the Suitability Model in one or more supplemental comment letters as these ongoing efforts proceed.

In addition, the Industry Groups note that the Securities and Exchange Commission (“SEC”) issued three regulatory proposals (collectively, the “SEC Proposal”)4 on April 18, 2018, to enhance the standards of conduct and other rules applicable to investment professionals under the federal securities laws. The Industry Groups and their respective members are currently in the very early stages of reviewing and assessing the SEC Proposal. Given the importance of regulatory coordination among the NAIC, the SEC, and other regulators (as discussed below), the Industry Groups respectfully reserve the right to modify any or all of the comments set forth in this letter in light of the SEC Proposal. Any such modifications will be set forth in supplemental comment letters to the Working Group.

General Comments

As a preliminary matter, the Industry Groups believe it is important to acknowledge and recognize the effectiveness of the Suitability Model. The NAIC initially adopted the Suitability Model in 2003 to protect seniors against inappropriate sales practices. Revisions to that original version over the past 15 years have, among other things, extended the protections of the Suitability Model to all consumers and established insurer supervision and producer training requirements. As a result of these efforts, the Suitability Model now provides an effective regulatory framework to protect consumers. Following adoption of the U.S. Department of Labor (“DOL”) fiduciary rule 5 in 2016, the NAIC formed the Working Group to explore ways to further enhance the Suitability Model, and the Industry Groups appreciate the opportunity to participate in this important endeavor. We also commend the Working Group for recognizing the need for additional input from interested parties following the recent 5th Circuit Court of Appeals decision vacating the DOL Rule.

As many of us have indicated in previous comment letters to the Working Group, the Industry Groups also believe it is essential that all of the appropriate regulatory bodies working to develop enhanced standards of conduct for financial professionals engage in a constructive and collaborative dialogue before adopting any final rules. This effort should include the NAIC, the SEC, the DOL, the Financial Industry Regulatory Authority (“FINRA”) and the North American Securities Administrators Association (“NASAA”).

As the primary regulators for the insurance and securities industries, the NAIC and the SEC should lead this effort. They have the ability to adopt the most broadly applicable rules, and have robust examination and enforcement tools at their disposal to effectively ensure compliance or penalize violators for non-compliance. Unlike the DOL Rule, which would have applied only to recommendations made with respect to retirement assets, this approach would establish compatible and clear standards of conduct for recommendations made by all licensed financial professionals to retail consumers with respect to any annuity product.

As noted above, the Industry Groups generally believe that producers (and insurers, where no producer is involved) should act in their clients’ best interest when making an annuity recommendation, and the partial markup attached as Appendix A would expressly establish a best interest standard by incorporating the following language in Section 6.A:

In making a recommendation to an individual consumer, a producer, or an insurer where no producer is involved, shall act in the best interest of the consumer without placing the financial interests of the producer, or the insurer where no producer is involved, above the consumer’s interests.

The mark-up further indicates that a producer or insurer would meet this standard by (a) making reasonable efforts to obtain the consumer’s suitability information, (b) providing important disclosures about the nature and scope of available products and services, compensation (as discussed in greater detail below) and material conflicts of interest, (c) the suitability obligations already in place under the current Suitability Model, and (d) making a record of the basis for the We believe these requirements would ensure that producers and insurers are “acting in consumers’ best interest,” and would give regulators additional tools to help them identify and pursue enforcement actions against “bad actors” without unduly burdening “good actors.”

We also believe this approach aligns well with the SEC Proposal, although some of the Industry Groups are concerned that some state courts would interpret a “best interest” standard as giving rise to fiduciary status. While we use this term to describe the enhanced standard of conduct in the mark-up, we have also included the following language in Section 6.B(1) in the mark-up in an effort to avoid any such unintended interpretations:

Nothing contained in this regulation shall be deemed to …[c]ause any producer or insurer to be treated as a fiduciary, or impose a duty of loyalty on any producer or insurer, under common law or any federal or state law or regulation.

The SEC Proposal also states that the best interest standard would require an investment professional to act with reasonable care, skill, diligence and prudence. The mark-up does not include these terms. While some of the Industry Groups would support (or not oppose) the inclusion of one or more of these terms, others are very concerned that these terms would significantly increase the risk that a producer or insurer would be treated as a fiduciary, even if the language noted above is included in the Suitability Model. The Industry Groups will continue to discuss whether and how to include any or all of these terms in the Suitability Model. Among other things, the Industry Groups are considering whether any of these terms can be incorporated in a manner that clearly states their meaning and the steps that must be taken by a producer or insurer to comply with them.

Compensation

As indicated in the attached mark-up and guiding principles, the Industry Groups believe one of the most meaningful enhancements the NAIC could make to the Suitability Model would be the addition of disclosure requirements designed to provide consumers with relevant information they may need to make informed decisions about the financial professional with whom they will work and the products they will purchase. Information about producer compensation would be an appropriate component of a new disclosure requirement. However, it is critical that the compensation disclosure be appropriately tailored.

Compensation is often based on factors that simply are unknown at the time of the recommendation, such as consumer behavior (e.g., future contributions, withdrawals or surrenders). Moreover, the exact amount or percentage of compensation is not likely to be particularly relevant or useful to consumers. Rather, consumers should understand (a) that compensation will be paid, (b) whether and on what basis the amount of compensation on a particular product might rise or fall, (c) how the amount of compensation may vary among different products, (d) what benefits, services, and value the producer will provide, and (e) how to get more information, if so desired. Put another way, the disclosure requirements should focus on “how” compensation is determined rather than “how much” compensation is paid. The Industry Groups’ proposed approach to disclosure, including compensation disclosure, is outlined in Section 6.A(2) in the attached markup. The Industry Groups believe this disclosure framework would provide consumers with the information they may need to make reasonably informed decisions about whether to consummate the recommended transaction. Any potential expansion of these requirements should be considered carefully to avoid overwhelming consumers with information they don’t really need and may not be able to easily understand, or may not be relevant to their decision making.

Moreover, by providing compensation disclosure, the industry believes a “reasonable compensation” requirement would not be needed. A well-informed marketplace will effectively regulate itself without charging regulators with responsibility for setting or approving compensation rates or structures.

Issues Not Addressed in Attached Markup or Guiding Principles

As noted above, the Industry Groups have been, and will continue, working together to assist the NAIC in its efforts to revise the Suitability Model. In the interest of meeting the current comment deadline, the Industry Groups have focused their efforts to this point on the issues discussed above. However, there are a number of other important issues the Industry Groups have not yet had time to explore, including the following:

  • Insurer responsibility for supervision of third party producers under Section 6, which is especially a concern for independent agents who contract with more than a single insurer.
  • Possible revisions to the safe harbor provision in Section H to provide relief for producers and insurers when acting in compliance with enhanced standards of conduct that may be adopted by the SEC, FINRA, DOL or other regulators.
  • Possible enhancements to the training requirements under Section 7, and possible relief for producers who complete training courses that satisfy applicable FINRA requirements.
  • Insurer liability under Section 8 with respect to violations of the Suitability Model by producers when the insurer has fully satisfied its supervision obligations under Section
  • Effective date of any revisions to the Suitability Model, and possible grandfathering relief for recommendations made prior to the effective

The Industry Groups will submit supplemental comments to the Working Group when and if they are able to comment on these topics and any others that may arise.

Conclusion

Thank you again for the opportunity to provide these comments. If any member of the Working Group has questions about anything in this letter, or if we can be of any further assistance in connection with this important regulatory effort, please feel free to contact any of the undersigned individuals.

Sincerely,

 

 

 

Cc:

The Honorable Julie Mix McPeak, Tennessee Insurance Commissioner, NAIC President
The Honorable Eric Cioppa, Maine Insurance Superintendent, NAIC President-Elect
The Honorable Raymond Farmer, South Carolina Insurance Director, NAIC Vice President
The Honorable Gordon Ito, Hawaii Insurance Commissioner, NAIC Secretary-Treasurer
Mr. Michael Consedine, NAIC Chief Executive Officer


Notes

1 See email message from Jolie Matthews, NAIC Senior Health and Life Policy Counsel, to Working Group members, interested regulators, and interested parties, dated March 24, 2018.

2 Unless otherwise expressly stated, terms used in this letter that are defined in the current Suitability Model (e.g.,“insurance producer,” “insurer,” “recommendation,” etc.) have the meanings ascribed to those terms therein.

3 The term “financial professional” is used throughout this letter to refer to any individual who provides advice or recommendations about annuities or other insurance or investment products, including state-regulated insurance producers as well as securities-licensed representatives of broker-dealer or investment adviser firms.

4 See Regulation Best Interest, Exchange Act Release No. 34-83062 (April 18, 2018); Form CRS Relationship Summary; Amendments to Form ADV; Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles, Exchange Act Release No. 34-83063 (April 18, 2018); and Proposed Commission Interpretation Regarding Standard of Conduct for Investment Advisers; Request for Comment on Enhancing Investment Adviser Regulation, Investment Advisers Act Release No. IA-4889 (April 18, 2018).

5 As used in this letter, the term “DOL Rule” means, collectively, the final regulation defining the term “fiduciary” (the “Fiduciary Definition Regulation”) under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), the Best Interest Contract Exemption (the “BIC Exemption”), and the amendments to prohibited transaction exemption 84-24 (the “Amended PTE 84-24”) issued by the DOL on April 8, 2016.

 

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