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Best Interest

NAIC Updated Suitability in Annuity Transaction Model Regulation

Overview

The February 2020 revisions of the National Association of Insurance Commissioners (NAIC) Suitability in Annuity Transaction Model Regulation (“annuity model”) was developed over two years, by working with key stakeholders to develop a workable standard of care for the recommendation and sale of annuities. This standard of care, which would provide consumer confidence in guaranteed-income products, should obviate efforts by regulators to write unnecessarily overbearing rules. Additionally, it provides a uniform framework consistent with other federal and state standard-of-care rules.

NAIFA was an active participant in the NAIC’s deliberations and supports the amended model. The annuity model does not require fiduciary duty or require recommending the least costly product and maintains and expands a safe harbor so that financial professionals meeting the standards required by another regulator with comparable standards would satisfy the annuity model standard.

Background

The Best Interest Standard of Care requires a producer, or insurer where no producer is involved, to act in the best interest of the consumer, meaning that they considered the consumer’s needs and financial interests over their own.

Model Regulation 275 – Suitability in Annuity Transaction was originally adopted in 2010 and established the suitability standard. However, there had been a lot of “noise” in the last few years about whether a suitability standard was sufficient, or if there was a gap between what was “suitable” and what was truly in the “best interest of the client.” Federally, both the Department of Labor (DOL) and the Securities and Exchange Commission (SEC) have released final rules clarifying that financial professionals must put the clients’ interests before their own.

It became clear that the NAIC would need to develop an enhanced standard to be in alignment with the DOL and the SEC or risk the development of far more unworkable state laws and regulations. The February 2020 amendments reflect this effort and include additional enhancements.

Best Interest Standard of Care

Producer Requirements

One of the most important elements of the NAIC model is that it clearly defines the benchmarks that producers must meet to satisfy the obligation to the client. These are:

  • Care
  • Disclosure
  • Conflict of interest
  • Documentation

To satisfy the four obligations, when making a recommendation, producers must:

  • Know the consumer’s financial situation, insurance needs, and financial objectives.
  • Understand the available recommendation options.
  • Have a reasonable basis to believe the recommended option effectively addresses the consumer’s financial situation, insurance needs, and financial objectives.
  • Communicate the basis of the recommendation to the consumer.
  • Disclose their role in the transaction, products they are licensed and authorized to sell, source of their compensation, and any material conflicts of interest.
  • Document, in writing, any recommendation and the justification for such recommendation./li>

Expanded Supervision Requirements

The model now requires insurers to establish and maintain reasonable procedures to identify and eliminate any sales contests, sales quotas, bonuses, and non-cash compensation that are based on sales of specific annuities within a limited period.

Expanded Annuity Training Requirements

The model sets enhanced continuing education requirements for annuities. This includes updated education material and coursework that includes the best interest obligations and producer requirements.

Safe Harbor

The revised model includes an expansion of the safe harbor for sales made by broker-dealers in compliance with FINRA requirements to include recommendations and sales of annuities made in compliance with “comparable standards” by registered investment advisors and investment advisory representatives, not regulated by FINRA, but subject to fiduciary duties.

NAIFA Position

NAIFA encourages states to swiftly and uniformly adopt the revised NAIC Annuity Best Interest Model. Its adoption aligns with the NAIFA’s goal of creating a uniform and standardized sales process for producers across the country. Further, the best interest standard of care aligns with a core component of NAIFA’s producer Code of Ethics.

The revised NAIC model aligns well with its federal counterpart, the SEC’s Regulation Best Interest. Together, these two initiatives will significantly enhance protections for consumers across the country who seek guaranteed lifetime income in retirement through annuities. Any proposal of this model that doesn’t specifically reference the words “best interest” would create a significant credibility problem and would give fuel to proponents of a fiduciary standard who claim that any such proposal really was nothing more than “warmed-over suitability.”

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