August 7, 2018
Mr. Brent J. Fields Secretary
Securities and Exchange Commission 100 F Street, N.E.
Washington, D.C. 20549-1090
Re: Regulation Best Interest (RIN 3235-AM35); Form CRS Relationship Summary, Amendments to Form ADV, Required Disclosures in Retail Communications and Restrictions on the use of Certain Names or Titles (RIN 3235-AL27)
Dear Mr. Fields,
The Association for Advanced Life Underwriting (“AALU”) is the leading organization of life insurance professionals who are a trusted voice on policy issues impacting Americans’ financial security and retirement savings. Our 2,200 members are primarily producers engaged in the sale of life insurance used as part of estate, charitable, retirement, and deferred compensation and employment benefit services.
As part of their service for clients, our members offer variable products, such as variable life insurance and variable annuity products. These products offer consumers investment choices for accumulating cash values—the variable element of the product— with separate guarantees from the issuer such as a guaranteed death benefit and lifetime income. These are important options for customers seeking to address their protection and retirement needs using life insurance and annuity products. These tools are recognized as even more important in recent years to address risks to families and businesses of premature death and of outlivingsavings.
We appreciate the efforts of the U.S. Securities and Exchange Commission (“Commission”) to ensure that the standard of care for broker-dealers and registered investment advisors is appropriate and protects consumers. The Commission has deep experience in the regulation of securities products, as we noted during the comment process for the Department of Labor’s (“DOL”) fiduciary rule. The Commission is the proper agency to take the lead in this area.
AALU’s members work in the best interest of their customers every day. We support a workable and appropriately tailored best interest standard that is neutral to business model, product type, and compensation approach, while preserving consumer choice and access to products and services to meet their varied financial planning needs.
Through our letter, we sought to provide detailed information in areas where we believe AALU, based upon our members’ business and expertise, can be most helpful in furthering the Commission’s understanding of the important issues raised in the Proposal, and we look forward to continued engagement with the Commission throughout this process.
Life Insurance and Annuity Products Provide Unique Value
Life insurance and annuity products offer essential benefits to 75 million American families and many businesses—providing protection, financial security, and peace-of-mind. Consider the following benefits of life insurance products:
The life insurance industry plays a critical role in capital formation in America. Life insurance companies have assets supporting nearly $7 trillion dollars in fixed and variable insurance products. Around 48% of the total assets of life insurance companies are held in long-term bonds, with these companies purchasing over 22% of all corporate bonds.ii There is $20 trillion of financial protection in force through life insurance products, which comprise nearly 17% of long-term savings for U.S. households. The life insurance industry pays out $1.7 billion daily and generates 2.6 million American jobs.iii Life insurance products play an essential role in providing financial and retirement security to American families and provide a variety of solutions for our nation’s businesses.
The Current Regulation of Life Insurance Professionals and our Industry is Robust
Life insurance professionals are governed by every State in which they operate, the carriers whose policies they sell (each of which is approved in the State sold), the Commission, DOL, and FINRA.
The Commission and FINRA enforce the antifraud provisions and the just and equitable principles of fair dealing enumerated in the Securities Act of 1933 and the Securities Exchange Act of 1934, and through FINRA’s rules. An important aspect of fair dealing is the obligation that registered representatives make investment recommendations that are suitable and consistent with the interests of the customer. FINRA rules 2090 and 2111 collectively require the registered representative to obtain certain essential facts concerning every customer and to use that information to reasonably determine whether an investment product or strategy is suitable prior to making an investment recommendation. When a sale of securities is executed, broker- dealers are paid a commission from the product sponsor, mutual fund, or insurance company, instead of a fee by the client. The broker-dealer has responsibility for reviewing the offering of the product and having a separate determination of suitability by a registered principal of the firm.
For AALU’s members, FINRA Rule 2330 sets forth enhanced and extensive regulatory and supervisory sales practice requirements for recommended purchases or exchanges of variable annuities. These include detailed disclosures about the product, including disclosures of its various features, such as the potential surrender period and surrender charge, potential tax penalty if customers sell or redeem early, mortality and expense fees, investment advisory fees, potential charges for and features of riders, the insurance and investment components of deferred variable annuities, and market risk. These types of disclosures, detailed as to the features and risks of particular types of investment products in relation to their benefits, are meaningful for investors. Together with information relating to costs and fees provided in confirmations, account statements, and other materials, these types of disclosures enable investors to comprehensively evaluate the products and all associated fees and charges.
More specifically, FINRA Rule 2330 requires:
This enhanced level of due diligence, supervision, and standard of care exceeds the standards applicable to other securities products and the principles-based standards applicable to investment advisors.
Existing disclosure and other customer protection requirements are buttressed by the requirements for daily suitability review by a registered, qualified principal of the broker-dealer of all recommended transactions effected by a broker-dealer – a review that is heightened for products that may present higher risks. Moreover, these internal supervisory and audit procedures are further buttressed by the robust examination programs administered by the Commission, FINRA, and State securities regulators. The frequency and intensity of FINRA audits of broker-dealers means that many potential problems will be detected and corrected through the examination process, and it gives broker-dealers a strong incentive to continuously monitor and adhere to regulatory requirements.
In addition, insurance producers who sell variable products are subject to multiple layers of regulation and oversight—by the Commission, FINRA, State securities regulators (including in each State in which they operate, which often results in oversight by multiple State securities regulators), and State insurance regulators (also in each State in which they are licensed and operate, which again results in oversight by multiple State insurance regulators). Insurance producers are subject to detailed requirements by the carriers who appoint them. These companies employ a due diligence process with new producers to ensure they are working with reputable, licensed, and educated producers, and carriers continue to review producer activity through the tracking of consumer complaints as mandated by state insurance regulators. Insurance producers are also subject to robust internal supervisory procedures by the broker-dealers with which they are affiliated.
The design of variable life insurance products requires medical and often financial underwriting that goes beyond the requirements for traditional securities. The complexity and breadth of applications relating to these products requires an assessment primarily of financial and protection needs. This necessitates an analysis related to death benefit, cash values, tax considerations, and costs. Further, with each application insurance underwriters assess the need for the coverage, the appropriateness relative to the amount of coverage, the ability to pay-in some cases the underwriter will even interact with the financial professional on the product, premium payment design, and riders selected to accompany the policy.
In addition to the Commission’s and FINRA’s roles in the registration and sales of these products, the products are also regulated by State insurance commissions. Registered representatives who sell these products are subject to the terms of their contract with the issuing insurance company, which is subject to regulation by multiple state insurance regulators. Indeed, the scope and level of regulation is significantly higher for variable life insurance products than for other securities under the existing standard of care.
We discuss the business of our members and the regulatory requirements specific to the sale of variable products in more detail in Attachment A to this letter.
Coordination between Federal, FINRA and State Regulation is Essential
As the Commission develops a final rule, it is essential to collaborate with federal, FINRA, and State regulators for all types of securities products. Consistency across all regulatory platforms is in the best interest of consumers. As demonstrated by our recent experience in complying with the DOL Rule, a lack of sufficient coordination with other regulators can cause significant harm and disruption in the marketplace that can curtail consumer choice.
Regulation Best Interest: Conflicts of Interest
One of our biggest concerns with the proposal is the lack of clarity around mitigating or eliminating conflicts of interest with financial incentives. As explained above, registered representatives are currently required to comply with a number of federal, FINRA, and State regulations, as well as a variety of broker-dealer and carrier supervisory policies and provisions, to mitigate conflicts of interest and ensure consumers’ best interests are being served. The concept of mitigation, while not clearly defined in the Proposal, appears to closely align with compliance and supervisory policies, procedures, and well- accepted industry practices, such as processes for compliance with FINRA Rule 2330. Adding another regulatory requirement, mitigation, which is not clearly articulated potentially creates confusion and adds and unnecessary costs for investors, registered representatives, and firms. It is unclear what specific concerns the Commission is trying to address around mitigating conflicts, or what additional mitigation measures it is seeking. Additional clarity in this area is critical in the final rule, or this unclear mitigation concept should be omitted from the final rule. To be clear, there should be flexibility around mitigating conflicts of interest—it should be based on individual facts and circumstances rather than establishing a one-size-fits-all framework. Overly-rigid mitigation requirements could limit consumer choice of products and access to professional financial advice.
We are also concerned about the lack of clarity around eliminating conflicts of interest. Outside of clear and specific guidance from the Commission as to what conflicts must be eliminated—not simply disclosed (or mitigated)—broker-dealers may potentially interpret the rule in a conservative manner, reducing choice by curtailing products and services that are well-suited for some investors. Again, additional clarity in this area is necessary in the final rule or this concept should not be included in the final rule.
Finally, the concepts of mitigation or elimination of conflicts of interest are not developed in the principles- based regulatory regime applicable to investment advisors. Thus, in addition to potentially creating new, duplicative, and confusing regulatory standards with these unclear concepts, these aspects of the rule will potentially further exacerbate the trend of retraction of the range of products offered by broker- dealers. This potential result is in complete contradiction to language in other areas of the Proposal and in the public statements by the Commission.
Final Rule Must be Compatible with Life Insurance Business Models
The life insurance industry has unique characteristics in terms of business models in the financial services industry, and the Commission should take these differences into account to avoid unintended consequences that could negatively impact consumers whose needs are currently well served. For example, broker-dealers affiliated with life insurance companies generally have significantly different characteristics from full- service broker-dealers in terms of products, services, and operations. Many registered representatives affiliated with life insurance-focused broker-dealers principally sell proprietary life insurance and annuity products. Additionally, some broker-dealers and their registered representatives are dually registered as investment advisors.
Some life-insurance-affiliated broker-dealers are strictly wholesale operations, distributing variable products through affiliated and non-affiliated broker-dealers. These broker-dealers do not generally engage with retail customers or hold securities or customer funds. Some broker-dealers conduct both wholesaling and retail activity. Many producers use a wholesaler to increase the choice of products available to their clients. Having access to a larger suite of products allows producers to find the most appropriate solution to meet their clients’ particular needs.
Life insurance and annuity products have always been largely commission-based, a system developed through decades of regulation and supervision by federal and State regulators. In fact, many States review and approve the commissions that can legally be charged for certain insurance-based products. Congress affirmed the importance of commission-based advice in the context of the standard of care for investment advice by ensuring in Section 913 of the Dodd-Frank Act that receipt of a commission should not, in and of itself, be deemed a violation of a future Commission-promulgated standard of care rule.
One of the values of commission-based compensation is that the structure is directly tied to the features of the product. Variable life insurance and annuity products are typically more multidimensional products due to their structure, and the additional time necessary to review these types of products with investors. Ultimately however, all recommendations must be suitable for a client based on the client’s current circumstances and objectives.
Commission-based compensation also provides value for investors. Long-term investors may prefer a single point-in-time payment over an ongoing, annual obligation that increases with the value of their investment account. For many investors a brokerage relationship is the better value for a particular transaction. For example, the annual fee associated with an investment advisory account can add up to far more money paid than a point-in-time commission, meaning that commission-based advice is often the most cost-effective option for certain retail investors to receive education and access to life insurance products.
Non-cash compensation associated with variable life insurance and annuity products is strictly regulated by FINRA under rules implemented to detect and prevent abuses and to protect consumers. The Commission should not prohibit currently-compliant compensation arrangements and business models, including non- cash compensation such as producer meetings with an educational component that reward aggregate producer production. Rather than choosing among different business models and compensation models, the Commission should emphasize clear and concise disclosure of conflicts of interest to customers and prospective customers.
Concerns About Reduced Choice and Access to Financial Advice for Consumers
We share the Commission’s goal of improving financial advice services for consumers. The benefits to the very same consumers is undermined if the final rule results in reduced product choice and access to professional financial advice. When protecting their families and saving for retirement, individuals must be able to choose what is right for them. It is essential for consumers to fully understand their options. We support clear and simple disclosure of roles, obligations, product offerings, and material conflicts so that consumers are protected, and choice is preserved.
In other product markets, consumers have the independence and freedom to make decisions based on their own determinants of value—including items that have a significant impact on retirement savings such as the purchase of a home. Standardized disclosures, data conformity, good faith estimates, consumer reports, and social media feedback exist to inform consumers, while preserving consumer choice.
Client Relationship Summary – Form CRS
AALU supports clear and simple disclosure of roles, obligations, product offerings, and material conflicts so that consumers are protected, and their choices are preserved. Investors would benefit from a short and simple disclosure statement that is presented by financial professionals at the outset of a client relationship, and we support the goal of Form CRS Relationship Summary (Form CRS”) in the Proposal in this regard. However, the Commission should work to avoid the creation of more confusing legalese that few consumers read or find useful to enhance clarity of comprehension.
With respect to format and delivery, the primary structural goal in the design of a disclosure statement should be to communicate material information as succinctly and plainly as possible, making additional layers of information available to the investor as needed or desired. The delivery of this information should be flexible. Retail customers should be able to access hard or electronic copies of disclosure statements, and both should provide opportunities to access additional information as it is needed (through hyperlinked documents, websites, or other means).
AALU Sample Disclosure Template
As part of the SEC’s 2013 Request for Information regarding standards of conduct for broker-dealers and investment advisors, AALU developed such a document, which is included below (Attachment B). Our goal was to develop a simple, user-friendly “first layer” document, which could be used to direct a customer to additional information if desired. This particular sample disclosure document was written to accommodate a financial services firm that offers insurance, broker-dealer services, and investment advisory services, and it therefore carefully distinguishes the roles and responsibilities relating to each area. However, it can be adapted to three forms, as the Commission has done with its mock Form CRS.
The marketplace is often depicted as one where consumers face a stark choice, commission-based advice or fee-based advice. The reality is that many advisors provide both types of services based on the best fit for the client. We developed our document with this important fact in mind—to clearly explain the different services that are being offered.
One of the firms that was involved in developing our document implemented a similar form on a voluntary basis. Roughly one-third of financial professionals at this firm use this sample disclosure form. While the evidence of its effectiveness is anecdotal, the client response to this disclosure form has been very positive.
During this process, they found it very difficult to develop a blanket disclosure document to encompass a single disclosure document for registered representatives. In their experience, a customized financial professional disclosure with specific licenses and services like Form ADV Part 2 is an important element to include in a final rule.
We thank the Commission for the opportunity to provide comments on this important subject. We support the Commission’s goal of ensuring that the standard of care for broker-dealers and registered investment advisors is appropriate and protects consumers, and believe it is the proper agency to take the lead in this area.
AALU supports a workable and appropriately tailored best interest standard that is neutral to business model, product type, and compensation approach, while preserving consumer choice and access to products and services to meet their varied financial planning needs.
Our members appreciate your thoughtful consideration of these comments. Please reach out with any questions you have.
Chief Operating Officer
Association of Advanced Life Underwriting
i Rebecca Moore, Pre-Retirees Want Lifetime Income Guarantees, Plan Adviser, October 17, 2017, available at: https://www.planadviser.com/pre-retirees-want-lifetime-income-guarantees/.
ii These calculations are based on data from the 2017 NAIC Annual Statement Data and ACLI calculations based on the U.S. Federal Reserve Board, Flow of Funds Accounts of the U.S.
iii American Council of Life Insurance, Life Insurers Fact Book, 2017, available at: https://www.acli.com/posting/rp17-009.
iv The DOL Fiduciary Rule: Study on How Financial Institutions Have Responded and the Resulting Impacts on Retirement Investors, August 9, 2017, Deloitte & Touche LLP.
v IRI Issues Fourth-Quarter 2016 Annuity Sales Report,” March 30, 2017.
vi See Letter from David J. Stertzer to Department of Labor, Definition of the Term “Fiduciary”—Additional Comments Regarding the Economic Impact of the Rule and Associated Exemptions (RIN 1210-AB79), April 17, 2017, available at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB79/01422.pdf; See Also Letter from David J. Stertzer to Department of Labor, Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions: Response to Question 1 Relating to Extending the Transition Period of the Fiduciary Rule (RIN 1210-AB82), July 21, 2017, available at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB82/00263.pdf; See Also Letter from David J. Stertzer to Department of Labor, Request for Information Regarding the Fiduciary Rule and Prohibited Transaction Exemptions (RIN 1210-AB82), August 7, 2017, available at: https://www.dol.gov/sites/default/files/ebsa/laws-and-regulations/rules-and-regulations/public- comments/1210-AB82/00584.pdf.
Read full letter here.
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