WASHINGTON - States are beginning to take steps to tighten suitability standards for variable-product sales.
The California Assembly is considering a bill approved by the state Senate that would give John Garamendi, the state's insurance commissioner, authority to oversee suitability standards for insurance agents selling variable products, including annuities.
Both the California legislation and regulations proposed in Kansas (InvestmentNews, May 30) would require insurance companies that issued variable products to take steps to determine whether their products were being sold suitably to citizens of the states, regardless of age. In addition, Missouri has proposed regulations that include grounds for disqualifying agents who made unsuitable variable-product sales.
"The insurance commissioner doesn't have authority over individual sales," said Alison Merrilees, former legislative consultant to state Sen. Jack Scott, a Pasadena Democrat, who sponsored the California bill. California, unlike most states, legally defines variable products as securities, she said. Ms. Merrilees added, however, that the state securities regulator doesn't have authority over insurance agents, leaving a regulatory gap at the state level.
"For any insurance agents selling variable annuities in California, there's no state regulator," she said. Variable products are defined as securities under federal law; NASD and the Securities and Exchange Commission have regulatory authority over them.
State regulators have lobbied hard to include variable products as securities under state jurisdiction, but for the most part, the insurance industry has beaten back their attempts to gain control along with their federal counterparts (InvestmentNews, Oct. 25).
In addition to giving the state insurance commissioner the authority to enforce suitability standards for insurance agents who sold variable products and annuities, Mr. Scott's bill also would stipulate that insurance agents would be in compliance with state suitability standards if they met NASD's regulations.
Washington-based NASD last December sent to the SEC for approval a controversial proposed regulation that would establish suitability standards for variable products. NASD said numerous complaints of unsuitable sales prompted the proposal, which the insurance industry has opposed.
Part of the original NASD proposal dealing with point-of-sale disclosure was cut. The life insurance industry still disagrees with singling out variable products for specific suitability standards.
Carl Wilkerson, vice president and chief counsel for securities and litigation at the American Council of Life Insurers in Washington, indicated that the life insurance industry will oppose the NASD suitability standard on the grounds that it would be anti-competitive for variable products in relation to other types of securities products.
"It's just odd that you have one suitability rule for the entire universe of securities products and then a second rule for a single product," he said.
"It's part of a pattern of regulatory grandstanding that the NASD has exhibited," Mr. Wilkerson said. "They have gone to excessive lengths to appear to be a tough regulator, and they're frequently fumbling the ball because of their lack of depth in understanding the product or the market."
The ACLI and the Association of California Life and Health Insurance Companies in Sacramento want California and other states to adopt standards that conform with model standards adopted by the National Association of Insurance Commissioners in Kansas City, Mo. The California bill focuses more on the insurer's responsibility to review applications from agents.
While the NAIC model regulation is aimed at sales made to older Americans, Kansas is "looking at protecting anyone buying a variable annuity," said Charlene Bailey, a spokeswoman for the Kansas Department of Insurance in Topeka.
"You can have younger people who should not be spending their money on a variable annuity either," she said. "We're looking at what's best for Kansans in terms of protecting their financial resources."
Missouri's proposed regulations stipulate steps that agents must take to ensure that sales of variable products are suitable. Companies selling the products would also have to provide supervision over agents selling them, said Matt Barton, a spokesman for the Missouri Department of Insurance in Jefferson City.