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Annuity Suitability & Best Interest Standard

Last Updated 3/05/2019

Issue: Since 2003, state insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs. The Suitability in Annuity Transactions Model Regulation (#275) serves as a basis for this regulatory framework. Model #275 sets forth standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are appropriately addressed. Since the model's original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA). Most states have enacted the updated version of Model #275.

Background: The Annuity Suitability (A) Working Group was appointed in 2017 to review and revise, as necessary, Model #275, to promote greater uniformity across NAIC-member jurisdictions. Renewed interest in the model was prompted, in part, by work being done at the federal level. In April 2016, the U.S. Department of Labor (DOL) completed regulations broadening its definition of "fiduciary investment advice" under the federal Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). These regulations expanded the scope of who is considered a fiduciary to ERISA retirement plans and individual retirement accounts (IRAs). This included a broader set of insurance agents, insurance brokers and insurers, resulting in far-reaching implications for the retirement marketplace.

On March 15, 2018, the 5th U.S. Circuit Court of Appeals issued a decision vacating the DOL fiduciary rule in its entirety, which was officially mandated June 21, 2018. The 5^th^ Circuit held the rule, which expanded the definition of "fiduciary investment advice" under ERISA and the IRC, was "arbitrary, capricious and exceeded the agency's regulatory authority under ERISA." The DOL did not appeal the court's decision and the rule is now vacated. It is unclear what the next steps will be for the DOL.

Separately, the U.S. Securities and Exchange Commission (SEC) released a proposed rule package on April 18, 2018, updating the standard of care broker-dealers and investment advisers would be required to provide to retail investors. The rule was published in the Federal Register May 9, 2018, which specified a 90-day comment period ending Aug. 7, 2018. The NAIC submitted comments to the SEC to further coordinate our efforts so that our respective regulatory developments can provide consistency for consumers, industry, and regulators. A final rule is expected by mid-2019.

Additionally, the New York State Department of Financial Services proposed a new "best interest" standard in 2018 for agents and brokers licensed to sell life insurance and annuity products in the state. The regulation is aligned with the now vacated DOL "fiduciary rule" for retirement savings. Under the new mandate, product sales must prioritize customer's interest over sales commissions. It also states agents and brokers' compensation should not be influenced by the products it recommends. The National Association of Insurance and Financial Advisors for New York State (NAIFA-NYS) filed a lawsuit in November 2018 stating the new regulation contradicts current New York statutes requiring producers act on behalf of an insurer.1

Status: The NAIC Annuity Suitability (A) Working Group will continue its work to update Model #275 which it began in November 2017 and expects to finish in 2019. The Working Group is seeking clear, enhanced standards for annuity sales so consumers understand the products they purchase, are made aware of any material conflicts of interest, and are assured those selling the products do not place their financial interests above consumers' interests.

The Working Group's draft amendments to Model #275 clarify that all recommendations by producers and insurers must be in the interests of the consumer. Included in the draft is a requirement that producers and insurers, where no producer is involved, act with "reasonable diligence, care, skill and prudence" and "act in the interests of the consumer at the time the recommendation is made, without placing the producer's or the insurer's financial interest ahead of the consumer's interests." It would further require producers to clearly explain to the consumer the basis for a recommendation and to document such justification in writing. This way, consumers can better understand why a particular product is consistent with their needs, situation, and objectives. Additionally, the draft requires producers to disclose and answer questions about: their role in the transaction, their compensation, and any material conflicts of interest. The Working Group will continue to discuss several additional proposals over the next few months.

The NAIC believes a high degree of harmonization across regulatory platforms would be beneficial to consumers and the industry. The NAIC hopes to continue a productive dialogue with the SEC, the DOL and other financial regulators as updates to the respective standards of conduct governing the sale of annuity products are considered.

1 https://www.fa-mag.com/news/insurance-agents-sue-to-overturn-new-york-s-best-interest-reg-42032.html

Committees Active on This Topic

Additional Resources

18-Month Extension
November 2017, Federal Register

Field Assistance Bulletin No. 2017-03 
August 2017, EBSA

Presidential Memorandum on Fiduciary Duty Rule 
February 2017, The White House

NAIC Comment Letter 
July 2015, NAIC

 DOL EBSA

Contacts

Media queries should be directed to the NAIC Communications Division at 816-783-8909 or news@naic.org.

Ethan Sonnichsen
Director, Government Relations
202-471-3980

NAIC Center for Insurance Policy and Research (CIPR)

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