Regulation, courts still transforming insurance products

Making features easier for consumers to understand

Jun 9, 2008 @ 12:01 am

By Darla Mercado

A combination of regulatory developments and court cases since 1998 has molded annuities and insurance products into what they are today — and that development continues.

From the Pension Protection Act to the Financial Industry Regulatory Authority Inc.'s Rule 2821, regulations have affected each link in the insurance chain, from lobbyists to financial advisers and clients.

"Significant legislative and regulatory developments have broken down traditional barriers in the financial sector," Frank Keating, chief executive and president of the American Council of Life Insurers in Washington, wrote in an e-mail. "[They have] made some progress in efforts to bring life insurance products and services to the marketplace more quickly and efficiently."

'ATTEMPT TO CLARIFY'

At the top of the list for advisers and attorneys is New York- and Washington-based Finra's Rule 2821, which sets rules on suitability standards and principal review involved when a registered representative sells a deferred variable annuity. As of May 5, segments of the rule that govern training standards for producers and sales suitability had gone into effect.

Meanwhile, implementation of a portion of the rule that will require principal review of the application within seven business days of the consumer's signing, and the portion covering supervisory procedures have been postponed pending SEC approval of rule changes.

"There's a greater effort to ensure that this is represented in simpler terms to the consumer," said Clifford E. Kirsch, a New York-based partner at Sutherland Asbill & Brennan LLP of Washington. "The critical thing is that it's an attempt to clarify VA products and guaranteed features, and it makes sure that investors understand what's guaranteed and what's not."

Consumer improvements aside, the rule raised criticism from Finra member firms and their principals, who insisted that seven business days was insufficient time to review the application. Principals at small firms were especially worried that this would lead to more time-consuming paperwork.

"We're the most regulated business on the universe, but I don't know what good it does," lamented a New Hampshire-based principal, who asked not to be identified.

"The VA form went from one page to six pages," the principal said. "If someone's going to do the wrong thing, do you think anything is going to stop them?"

Still, not all Finra's rules and notices were reviled by people selling insurance products. For instance, the August 2005 Notice to Members 05-50 by predecessor organization NASD — which provided guidance on equity index annuities — was a key development for broker- dealers and producers, according to Pasquale J. Sacchetta, president of CFIG Wealth Management in Westport, Conn.

"It changed the landscape on how indexed annuities are presented, sold and made available to any producer with securities licensing," he said. Notice 05-50 detailed the deceptive practices used to sell EIAs and stated that sales pieces deemed to be broker-dealer communications with the public would be subject to the regulator's rules.

In that notice, NASD also told broker-dealers to set supervisory limits for producers selling the products and to ensure that associates selling unregistered EIAs receive proper training in the product.

Since the industry has been awaiting guidance from the Securities and Exchange Commission on whether EIAs are securities, some advisers may consider Notice 05-50 to be a regulatory "power grab," Mr. Sacchetta said.

Nevertheless, "Finra told the broker dealers that they need oversight since these may be considered securities," he said. "Producers shied away from the EIAs because they had to go through the broker-dealer to sell them."

Throughout the last decade, Congress also has played a powerful role in the use and sale of insurance products. For instance, the Economic Growth and Tax Relief Reconciliation Act, passed in 2001, is just one development that has "given Americans the tools they need to save for retirement," according to Mr. Keating.

The legislation not only raised the limits for contributions into qualified plans and individual retirement accounts but also established the incremental increases in estate tax exclusions through 2009. However, these estate tax benefits didn't come without a negative effect: Consumers set aside the use of survivorship insurance for estate-planning purposes inside of an irrevocable life insurance trust because they anticipated a break on taxes.

"People understood that the exemption was going up over time and that the tax would be repealed [in 2010], but no one focused on the fact that we'd be back at square one," Mr. Sacchetta said. "Clients plan when they perceive there's a risk involved, but they'll just put it off because they're not sure what to do right now."

As a result, those who decided to purchase the insurance later probably wound up with less favorable underwriting and higher premiums when they finally wised up, Mr. Sacchetta added.

Finally, the act laid the groundwork for the Pension Protection Act of 2006, which provided consumers with retirement savings incentives and made insurance products a larger part of the process.

"[It] encouraged annuities as payout options in employer-sponsored retirement plans and permitted for the first time the combination of long-term-care insurance and annuities," Mr. Keating observed.

STILL IN FLUX

The most pivotal developments within the last 10 years are still unfolding: For instance, look for a new regulation proposal from Finra that would set standards on marketing communications and illustrations for VAs, especially on new guaranteed-income riders and withdrawal benefits, said Mr. Kirsch, whose firm is counsel to the Committee of Annuity Insurers, a -Washington-based annuity lobbyist. Both the law firm and the lobbying agency have had dialogue with Finra, he said.

"It's still very early, but they say their rules are outdated and haven't addressed the new generation of VAs," Mr. Kirsch said. "They want to provide better guidance on what companies can say about riders, and how they can be presented."

But this won't be so much a crackdown on products as an evolution to match VAs.

"They're not looking at making this more strict but rather getting [the rules] up to date," Mr. Kirsch said.

E-mail Darla Mercado at dmercado@investmentnews.com.

0
Comments

What do you think?

View comments

Upcoming event

Jul 09

Conference

Boston Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

Latest news & opinion

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

Cetera latest to be hit with data breach of personal information

Company is offering clients complimentary, two-year membership to an identity theft protection and credit monitoring service.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print