Insurance industry trade associations are telling state commissioners to put the words "best interest" back in a proposal to raise the advice standard for annuity sales.
In the latest iteration of National Association of Insurance Commissioners' annuity suitability model regulation, the organization says it wants to harmonize its rule with the Securities and Exchange Commission's advice reform proposal. The SEC intends to raise the broker advice standard through its so-called Regulation Best Interest.
But in a drafting note at the top of the NAIC proposal, the organization says it will refrain from using the term "best interest" until it is clear how the SEC's best interest regulation would differ from the fiduciary standard to which investment advisers are held.
Insurance industry groups criticized the removal of "best interest" from the proposal in comment letters that were due on Feb. 15.
"[I]f the model regulation does not include references to a requirement for an insurance producer or insurer … to act in consumers' 'best interest,' the model regulation may be viewed as weaker than the SEC Regulation Best Interest proposal and may not be an effective counter to individual state proposals seeking to impose a fiduciary standard of care in connection with the sale of annuities," J. Bruce Ferguson, senior vice president for state relations at the American Council of Life Insurers, wrote in a Feb. 15 comment letter.
The Insured Retirement Institute said the best-interest nomenclature should be affixed to the annuity sales standard.
"If the SEC final rule continues to use the phrase 'best interest' to describe the standard it adopts and the NAIC opts to use a different label for its enhanced standard, the result will be significant confusion and uncertainty among consumers, producers, carriers and regulators," Jason Berkowitz, IRI vice president and counsel for regulatory affairs, wrote in a Feb. 15 comment letter.
The NAIC launched its review of its annuity sales standard in 2017 in response to the Labor Department's fiduciary rule, which would have required brokers to act in the best interests of their customers in retirement accounts. The DOL measure applied to insurance products but was vacated by a federal appeals court last year.
The death of the DOL rule softened the insurance commissioners' reform, said Barbara Roper, director of investor protection at the Consumer Federation of America. The group submitted a comment letter on an earlier version of the NAIC's proposal but not on the current draft.
"Any impetus to make this an even remotely credible best-interest standard evaporated," Ms. Roper said. "NAIC can't even embrace the concept of acting in your customer's best interest. This is weaker than the existing suitability regulation for broker-dealers."
The insurance groups agree with the NAIC that the annuity sales rule should not subject transactions to a fiduciary standard. They differ, however, on how to achieve a best-interest standard.
In its comment letter, the ACLI outlined seven policy principles, including that best interest should not require the recommendation of the "least expensive or 'best' product available."
The IRI said the insurance commissioners should follow the SEC's lead because the agency has laid out a "principles-based regime [that] provides a clear and straight-forward compliance roadmap."
In its Feb. 15 comment letter, the National Association of Insurance and Financial Advisors said the NAIC rule should "require insurers to set forth standards and procedures for recommendations to consumers that are suitable" and meet their financial objectives.
A group of insurance independent marketing organizations outlined a "process-based" approach to best interest in their Feb. 15 comment letter that would make the standard "uniform, practical and predictable."
It's not clear when the NAIC will issue a final annuity sales rule. It's likely to wait until after the SEC releases its final rule, which may be as early as this summer.