Advisers at peace with NAIC proposal for more annuity rules

Although members of the insurance industry and some broker-dealer executives are butting heads with state regulators on tougher annuity regulation, financial advisers cheered the proposed use of Finra-esque suitability layers for all annuity sales.

“Registered reps are already so regulated, and we’re so used to it,” said Ron Palastro, an adviser at R.S. Palastro Financial Planning Services Inc. in Brooklyn, N.Y. “Insurance guys need to be brought up to a higher level of responsibility, and suitability doesn’t seem that out of line.”

Recently proposed amendments to the Kansas City, Mo.-based National Association of Insurance Commissioners’ Suitability in Annuity Transactions Model Regulation throw in extra suitability requirements for agents and advisers. These include a measure that would call for insurers to monitor insurance agencies and broker-dealers to ensure that distributors are sticking with the regulators’ standards and that all annuity sales are indeed suitable.

FINRA MODEL

Another of the changes would subject insurance agencies to an insurer-qualified supervision staff review and approval process that mirrors the principal reviews that take place at broker-dealer firms during variable annuity sales, in accordance with Finra Rule 2821.

“The model Finra uses is a good basis for suitability review. It has some components that broker-dealers must ask about, and that’s a good fit,” said Kim Shaul, deputy commissioner of insurance in Wisconsin.

She is the chairwoman of the NAIC’s Suitability of Annuity Sales Working Group, which drafted the proposed changes to the model rule this summer.

Through the exposure draft, regulators had aimed for uniformity between how broker-dealers and insurance agencies oversee annuity transactions, Ms. Shaul added.

The newly pitched concepts prompted a flurry of letters from insurance carriers and trade associations, including the National Association for Fixed Annuities.

Insurers complained about the extra responsibility and liability for watching all annuity sales and monitoring distributors. Milwaukee-based NAFA balked at the idea of applying a Finra-based suitability model to the sale of fixed insurance products.

Furthermore, obtaining clients’ investment information would be outside the daily business activities for insurance producers who work only in fixed insurance products, said NAFA’s executive director, Kim O’Brien.

“If [investments] are outside of their scope, then they’re adding to it,” she said. “When you consider a fixed annuity, the time horizon for the financial plan is much more of a determination than just the investment time horizon.”

PUSHING BACK

Advisers, meanwhile, are pushing back at the criticism from industry members, arguing that the time has come to place insurance agents under the enhanced suitability standards that they already have to follow when writing VA business.

Digging up information on clients’ investment objectives is already a part of what Kim Nourie, a senior vice president and registered representative at San Antonio-based Cross Financial Services Corp., does regularly.

“The suitability aspect is important for anything you’d recommend to a client, be it fixed or variable,” she said. “As an adviser I already feel obligated to talk about how much we put into the annuity, to make sure we have enough money to tap into if you have excess liquidity needs.”

However, compliance with those suggestions may be tougher for insurance agents who work primarily with fixed life insurance and annuities.

“If you’re asking a non-registered rep to make suitability commentary with their clients and it has to do with investments, then they’re doing things they’re not allowed to do,” said Jerry Vanderzanden, managing director at Advanced Equities Insurance Services Inc. of San Diego. “They’re not registered reps; they’re not in the domain of the investments.”

The additional oversight coming down from the carriers could also slow the flow of business, insurance industry leaders argue.

“It’ll probably slow down the approval, underwriting and issuance of various annuity products,” said Terry K. Headley, president-elect for the National Association of Insurance and Financial Advisors in Falls Church, Va. He is managing partner of Headley/Scott and Associates in La Vista, Neb.

GREATER RESPONSIBILITY

“It puts more responsibility on the carrier, and broker-dealers have to invest more money and resources into supervisory functions. That becomes a factor into the cost and interest-crediting rates for annuities,” Mr. Headley said.

Although many of the drafted suggestions are still preliminary and will be discussed at the NAIC national fall meeting next month, executives at large and small broker-dealers already have a wary eye on the regulatory developments.

“At first blush, the proposed changes, if adopted as currently written, would have a significant impact on all parties involved in annuity sales,” Paul J. Tolley, chief compliance officer at Commonwealth Financial Network in Waltham, Mass., wrote in an e-mail. The changes would be costly and burdensome to implement, he added.

The prospect of answering to Finra of New York and Washington and state insurance regulators for possible overlapping jurisdiction on more products is also burdensome for small broker-dealers and leaves them open to liability, said Tim Morton, vice president of business development for WBB Securities LLC in San Diego. He is a board member at the National Association of Independent Broker-Dealers in Princeton Junction, N.J.

“Advisers aren’t thinking too much about that, but when you open a can of worms for liability — failure to supervise — you push into deep pockets and put people out of business if someone doesn’t have the expertise to supervise,” Mr. Morton said.

E-mail Darla Mercado at [email protected].

Related Topics: Financial Industry Regulatory Authority, Industry, Money Management Institute (MMI), National Association Of Insurance Commissioners (NAIC)