States picking up annuity best-interest standard

Numerous states have been incorporating a model regulation for annuity sales that is designed to mirror the SEC’s Regulation Best Interest.

To date, nine states have passed rules based on the National Association of Insurance Commissioners’ model, and more are considering such measures.

The NAIC issued its proposed rule more than a year ago, and its incorporation by individual states has likely been slowed by the pandemic. The Security and Exchange Commission’s rule, passed in mid-2019, does not apply to annuities, which are insurance products covered by state regulations.

On Wednesday, Nebraska passed a law based on the NAIC's standard.

Idaho and North Dakota have also recently passed such rules, adding to other states on the roster: Arkansas, Arizona, Delaware, Iowa, Michigan and Rhode Island. Those considering similar regulations include Alabama, Kentucky, Maine, Montana, Nevada, Texas and Virginia.

The new regulations slightly change non-fiduciary sales of annuities, requiring brokers to put a consumer’s interests ahead of their own at the time they recommend the products. To satisfy that, sellers must be able to check off a list of four obligations around care, disclosure, conflict of interest and documentation, much as the requirements of Reg BI dictate. The new standard requires sellers to act with “reasonable diligence, care and skill.”

Industry groups, such as the Insured Retirement Institute, have applauded the updated regulations and urged states to incorporate them. The best-interest rule adds to existing regulatory requirements and will help protect annuity purchases, supporters have said.

Meanwhile, consumer advocates have said the new rules are little more than window dressing.

The model rule “is a bad joke with consumers as its victim” and is effectively the “same old weak suitability standard,” Barbara Roper, director of investor protection for the Consumer Federation of America, wrote in an email.

“It claims to address conflicts of interest, but then exempts the most significant conflicts — cash and non-cash compensation — from the definition of material conflicts of interest,” Roper said. “The only provision in the rule that could, if enforced, make some changes in the way annuities or sold is the provision limiting sales contests. But that provision is more likely to require companies to tweak their contests than to eliminate them entirely.”

And how effective the new regulations are depends a lot on how they are interpreted and enforced. Part of regulators’ strategy could be to make things vague, which can keep regulated entities on their toes.

Reg BI, for example, has been viewed as a “principles-based regulation,” even at 770 pages long. A lack of definition and compliance criteria could be designed to emphasize the spirit of the law, helping to ensure that brokers are unable to skirt it on a technical basis.

Editor's note: This story was updated with information about Nebraska's new annuity best-interest law.