Kentucky, Mississippi latest states to adopt annuity best interest rule

As a regulation designed to strengthen consumer protections surrounding annuity sales gains momentum nationwide, a Securities and Exchange Commission member recently highlighted key differences between the regulation and the SEC's broker standard of conduct.

Kentucky and Mississippi this month became the latest states to enact an annuity best interest rule based on a model regulation written by the National Association of Insurance Commissioners. The regulation amends the previous annuity suitability rule to prohibit insurance salespeople from putting their financial interests ahead of the interests of consumers in annuity transactions.

The annuity best interest measure has now been adopted in 18 states after being approved by the NAIC in February 2020. It is meant to align with the SEC’s Regulation Best Interest, a rule that went into force in June 2020 and governs broker recommendations to retail investors.

“The new rule adopted by the Kentucky Department of Insurance is an important win for Bluegrass State consumers seeking lifetime income in retirement,” American Council of Life Insurers CEO Susan Neely, National Association of Insurance and Financial Advisors CEO Kevin Mayeux and former NAIFA Kentucky president Brian Wilson said in a Nov. 17 joint statement.

The trade association leaders emphasized the annuity rule is not a fiduciary standard. The groups were among those that opposed and helped kill the Obama administration’s Department of Labor fiduciary rule, which they argued would have limited choices in investment products and made them more expensive.

“Unlike a fiduciary-only approach, [the NAIC model rule and Reg BI] make sure savers, particularly financially vulnerable middle-income Americans, can access information about different choices for long-term security throughout retirement,” the executives said.

Annuities provide an income stream in retirement many investors seek, but also tend to be complex and costly. They are often cited by investor advocates as products that can cause harm investors.

The insurance industry has touted the NAIC model rule as complementing Reg BI to strengthen investor protection. But in a recent speech, SEC Commissioner Allison Herren Lee pointed out that the annuity rule and Reg BI differ on how they address financial professionals’ conflicts of interest.

“That model, which was designed exclusively for the sale of insurance products, requires only disclosure of the producer’s compensation, and explicitly excludes that compensation from the conflicts of interest that require mitigation,” Lee said in a Nov. 4 speech to a conference on life insurance products. “Under Reg BI, which applies to the entire range of securities and includes variable insurance products, the commission came to a different conclusion about the need for and benefits of mitigation. As states continue to adopt and implement the NAIC model, I encourage those of you in the securities and insurance industries to evaluate your policies and procedures to ensure they are consistent with both standards.”

Jim Szostek, ACLI vice president and deputy for retirement security, said both the NAIC model rule and Reg BI directly address conflict of interest concerns and require compensation disclosure.    

“And while a producer’s compensation is not per-se a material conflict of interest, these rules require producers to further identify and avoid or reasonably manage and disclose to consumers material conflicts of interest, that is, a financial interest of the producer that a reasonable person would expect to influence the impartiality of a recommendation,” Szostek said in a statement. “A producer must ensure that in making a recommendation of an annuity she acts ... without placing [her] or the insurer’s financial interest ahead of the consumer’s interest.”

He also said the NAIC model rule requires insurers to identify and eliminate sales contests, sales quotas, bonuses and non-cash compensation based on sales of specific annuities.