Regulations that would raise the investment-advice standard for brokers in Massachusetts won’t apply to sales of variable annuities, the state’s top securities regulator indicated Wednesday.
Ever since Massachusetts released its final fiduciary rule last week, the insurance industry has been scratching its head about whether it would govern variable annuities. In the adopting release, the Massachusetts Securities Division said it “removed the express language regarding advice on commodities and insurance products from the final regulations.”
But insurance lobbyists remained concerned that Massachusetts considered variable annuities to be securities that would fall under the rule, based on documents on the regulator’s website and the fact that it has taken enforcement actions against broker-dealers who sell VAs.
On Wednesday, an aide to Massachusetts Secretary of the Commonwealth William Galvin said VAs are exempt from the fiduciary rule.
“Under Massachusetts law, variable annuities are not securities,” Debra O’Malley, a spokeswoman for Mr. Galvin, wrote in an email. “The regulations cover securities.”
That gave some initial comfort to Kent Mason, a partner at Davis & Harman who represents financial industry clients.
“That is great news,” Mr. Mason said. “In light of the historical position the division has taken and materials on their website, it would be great if that position was clarified officially.”
The insurance industry is looking for clarity because of Massachusetts securities regulators’ history of pursuing enforcement cases involving variable annuities, said Clifford Kirsch, a partner at Eversheds Sutherland.
“The [Securities Division] has been very aggressive in its interpretation of whether insurance is covered in the definition of a security,” Mr. Kirsch said.
Mr. Galvin said he’s promulgating an investment advice standard for the state that’s separate from the Securities and Exchange Commission’s Regulation Best Interest for brokers because Reg BI would not adequately protect investors from conflicted advice.
Variable annuities are defined as securities for federal regulation and fall under SEC oversight, which means Reg BI would apply to them. States vary in whether they consider VAs to be securities or insurance products.
The vacated Labor Department fiduciary rule for retirement accounts would have applied to VAs, which can provide an income stream for retirees but are often complex, high-fee products. VAs have become the poster product of the fiduciary duty debate.
Massachusetts’ decision not to apply its fiduciary rule – which requires brokers to provide investment advice without regard to their own financial interests – to annuities was welcomed by the American Council of Life Insurers.
Carl Wilkerson, ACLI vice president and chief counsel, said Massachusetts’ interpretation on VAs moves its fiduciary rule closer to Reg BI and positions it to complement a model annuity sales rule proposed by the National Association of Insurance Commissioners.
“For the most part, the Massachusetts regulation aligns with the SEC’s Regulation Best Interest,” Mr. Wilkerson said. “It is a worthwhile endeavor to have harmonized regulations across all state and regulatory platforms.”
There may be detours before the regulatory road reaches harmonization.
New Jersey and Nevada are poised to release their own fiduciary rules. Financial industry representatives who back Reg BI have indicated they’re considering suing Massachusetts and the other states over federal preemption and other issues. Regulation Best Interest must be implemented by June 30.
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