For well over a year now, Annuity News & Lifelines (AN&L) has been writing about the Department of Labor (DOL) fiduciary rule. As you are aware, certain elements of the rule went into effect on June 9, 2017. As of that date, producers who sell annuities where the funds originate from certain qualified plans such as an Individual Retirement Account (IRA) or a 401(k) are now considered a fiduciary and are subject to impartial conduct standards, which include giving advice that is in the best interest of their client.
The benefits and challenges to the rule have been discussed in AN&L at length. The benefits are clear. Most people associated with the financial services industry that you speak with would agree that, in principle, a best interest standard is a good thing. Most would agree that putting the best interest of the client first is not only good business, but that it is the right thing to do. However, the problem is that the challenges are also clear. How does one prove they have acted in the best interest of their client as defined by the DOL? The financial services industry has fought hard to change the regulation because of the expense and complexity associated in complying with the rule as written. All of this has brought us to where we now stand. The full implementation of the rule has been delayed until July of 2019 while the DOL, at the direction of the President, conducts a full review of the rule to determine if it should be fully implemented, reworked, or repealed.
Recently, the National Association of Insurance Commissioners (NAIC) as well as individual states have been more vocal in joining the dialogue. Historically, state insurance laws have fallen under the suitability guideline, meaning that the sale of an annuity must be suitable for the client but not necessarily satisfy “best interest” standards or be done as a fiduciary. Insurance regulators from the state of New York, for example, have recently proposed an amendment to their Suitability in Life Insurance and Annuity Transactions Model rule that would add a best interest standard that is broader and would be applicable to both insurers and insurance producers. Further, the New York finance superintendent has pressed the other state commissioners in a comment letter to the NAIC to adopt its proposed rule nationwide. The proposed amendment is currently under a 60-day comment period that ends on February 26, 2018.
While having a uniform best interest standard is a worthwhile endeavor, there are several concerns that immediately come to mind with this proposed amendment. The main problem is many critics of the current DOL rule have been lobbying for the Securities and Exchange Commission (SEC), in coordination with the NAIC, to put together a best interest standard that all other regulatory bodies could then fall under. If individual states start to enact their own rules, it could create a host of different standards that would make it extremely difficult to comply. Imagine if New York, Georgia, and California each had a different set of rules to ensure a best interest standard. It would be burdensome to say the least for insurers to know that each sale was in a client’s best interest when that definition has multiple definitions, interpretations, or enforcement mechanisms. This is likely why New York has requested that their version be adopted nationally.
Perhaps of more concern for insurers is that the New York proposal covers not only instances where the funds originate from a qualified plan such as an IRA or a 401(k), but all transactions. And it would also extend to life insurance and non-retirement accounts/funds. This could be problematic given the sheer number of insurers and products in the life insurance marketplace. Trying to verify that a life insurance sale was in the best interest of a particular client seems impracticable.
At the same time, the NAIC itself has proposed changes to the annuity suitability model and is requesting comments from the industry. The draft document draws a distinction that the producer must put the interests of the client “first and foremost”. At the same time it also states:
“‘Best interest’ does not mean a resulting recommendation is the least expensive annuity product, or the annuity product with the highest stated interest rate or income payout rate, available in the marketplace at the time of the annuity transaction. “Best interest” also does not mean the recommendation is the single “best” annuity product available in the marketplace at the time of the annuity transaction, but based on the insurance producer’s judgment acting with reasonable diligence, care, skill and prudence, the producer believes the recommendation is in the best interest of the consumer.”
These changes do not extend to life insurance at this time as does New York’s proposal.
We expect this issue to remain fluid for now and will keep you apprised of the noteworthy developments. But while this debate goes on, remember that you must act as a fiduciary when selling annuities when the funds are coming from certain qualified plans. There are a host of requirements that come along with this and we encourage you to reach out to AAAE and speak to us about any questions that you may have.
Heath Waddington | Senior Vice President of Sales & Marketing
Ann Arbor Annuity Exchange
Ph: 800.321.3924 x140 | Dir: 734.786.6140
Ann Arbor Annuity Exchange and its representatives do not offer tax or legal advice. Please consult your tax advisor or attorney.
 New York State Department of Financial Services. “Proposed First Amendment to 11 NYCRR 224 (Insurance Regulation 187). 27 Dec 2017. Web. Accessed 12 Feb 2018 at http://www.dfs.ny.gov/insurance/r_prop/rp187a1text.pdf
 Vullo, Maria T. Letter to Annuity Suitability (A) Working Group22 Jan 2018. Web. Accessed 12 Feb 2018 at http://www.naic.org/documents/cmte_a_aswg_related_new_york_doi_comments.pdf
 Annuity Suitability (A) Working Group’s proposed revisions to the Suitability in Annuity Transactions Model Regulation (#275). Eversheds-Sutherland. 24 Nov 2017. Web. Accessed 29 Jan 2018 at https://us.eversheds-sutherland.com/portalresource/cmte_a_aswg_exposure_draft_revisions_275.pdf
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