A new government regulation aimed at enforcing tougher ethical standards on annuity brokers and other financial professionals is set to roll out nationwide June 30, 2020.

The rule, called Regulation Best Interest, is big news in the financial world and debuts after years of attempted reform.

Crafted by the U.S. Securities and Exchange Commission, the rule requires more financial professionals to act in the best interest of their clients.

However, some states and consumer advocates say stronger steps must be taken to protect customers.

But with hundreds of billions of dollars in sales at stake, the financial industry is fighting hard against measures that may restrict annuity transactions.

Department of Labor Proposes 2016 Fiduciary Rule for Brokers, Advisors

In 2016, the U.S. Department of Labor proposed a measure to enforce stringent ethical standards, known as fiduciary rules, on individuals who work with retirement plans or provide retirement planning advice — including advisors, brokers and insurance agents.

Fiduciaries already adhere to this strict ethical and legal requirement. These financial professionals tend to be paid through fees rather than commission and are legally required to put the best interest of their clients ahead of their own.

A certified fee-only financial planner is an example of a fiduciary.

According to the Institute for The Fiduciary Standard, a fiduciary has six key duties:

  • Act in utmost good faith
  • Act prudently — with the care, skill and judgment of a professional
  • Avoid conflicts of interest
  • Serve the client’s best interest
  • Disclose all material facts
  • Control investment expenses

But not all financial advisors are fiduciaries. Many insurance brokers are subject only to what’s known as the suitability standard. This lower standard simply requires brokers to make “suitable” recommendations to clients.

In other words, brokers can propose a high-commission investment so long as the product meets a customer’s overall goals — even if much better investment opportunities exist.

Department of Labor Fiduciary Rule Dies in Court

Brokers would be required to tell clients about any conflicts of interest and commissions received from selling products such as annuities under the proposed fiduciary rule.

It’s likely this would have dismantled a commission structure popular throughout the industry.

The Labor Department’s fiduciary rule was proposed under President Barack Obama. President Donald Trump’s administration refused to defend it. Subsequently, a federal appeals court tossed it in March 2018.

When the fiduciary rule was pending, sales of annuities suffered. Industry experts said confusion about requirements hampered efforts to sell annuities. Since the rule died, annuity sales have soared.

Still, requirements on financial professionals are far from a closed subject.

Thinking About Buying an Annuity?
A financial expert can talk to you about your specific financial needs and recommend the type of annuity that is right for you.

New Best Interest Rule Goes into Effect June 30, 2020

In 2019, the U.S. Securities and Exchange Commission adopted a new set of standards for brokers and associated persons called Regulation Best Interest.
The measure, also known as Reg BI, is set to go into effect June 30, 2020.

The SEC says Reg BI improves the quality and transparency of relationships between investors, advisers and broker-dealers by “bringing the legal requirements and mandated disclosures in line with reasonable investor expectations.”

Industry group Securities Industry and Financial Markets Association agreed, noting that the SEC rule “imposes a materially heightened standard of conduct” for broker-dealers.

With Reg BI’s effective date fast approaching, the SEC and the Financial Industry Regulatory Authority are providing firms with information and resources to facilitate compliance.

But Knut Rostad, president of the Institute for the Fiduciary Standard, severely criticized the SEC rule in a blog post. He argued that the commission isn’t strongly enforcing the conflict of interest mitigation rule.

He argues that Reg BI puts fiduciary principles in place without rising to the full fiduciary standard.

“The proposed rule has been hailed from the mountain tops as pro-investor because it calls for mitigation,” Rostad wrote. “Yet, the Reg BI release text itself explicitly says it does not require any ‘specific conflict mitigation measures.'”

Instead, Rostad said, broker-dealers will be able to tailor or even create their own measures meant to eliminate conflicts of interest.

Like Rostad, some state regulators and consumer advocates say Reg BI is weak and leaves consumers without significant protections.

States Go Their Own Way on Fiduciary Standard

Most regulation involving annuities is taking place at the state level. At least five states — where governments are mainly controlled by Democrats — have taken steps to enact their own fiduciary requirements. These states include New York, New Jersey, Nevada, Massachusetts and Connecticut.

Proposed state regulations have drawn cries from a financial industry worried that enacting various standards will make the regulatory landscape too complicated and unpredictable for national companies.

New York

In August 2019, New York made it mandatory for agents and brokers to ensure that any transaction involving insurance or annuities is in their client’s best interest. It also requires insurance companies to establish protocols for supervising agent and broker recommendations to clients.

The New York rule, known as Amended Regulation 187, took effect Aug. 1, 2019, for annuity sales and Feb. 1, 2020, for life insurance sales.

The standard aligns with requirements included in the failed Department of Labor fiduciary rule.

Major industry groups — including the National Association of Insurance and Financial Advisors New York chapter — sued the state in 2018 to overturn the regulation. But the groups lost after the New York Supreme Court upheld the amendment.

On July 31, 2019, the New York court concluded that the measure “reflects a rational and reasonable movement towards consumer protection.”

New Jersey

On July 17, 2019, New Jersey regulators conducted a hearing on a proposed fiduciary rule for brokers and advisors. It came in response to the SEC’s Reg BI, which state regulators see as inadequate.

The proposal aims to establish a uniform standard for financial professionals and rectify investor confusion that results from a lack of uniformity.

As in other states that have considered fiduciary rules, the New Jersey proposal has come under fire from industry groups who say it will contribute to an uneven patchwork of laws among states and conflict with federal requirements.

In its rule proposal, the New Jersey Bureau of Securities says it believes it is “necessary to ensure that persons involved in the securities markets are uniformly held to a high standard in their dealings with the general public.”

Massachusetts

Massachusetts Secretary of the Commonwealth William Galvin likewise found the SEC rule unsatisfactory. On June 14, 2019, nine days after Reg BI was approved, Galvin posted a proposed fiduciary rule on the state’s website and asked for public input.

“The fiduciary conduct standard is necessary in the public interest and for the protection of investors,” the notice stated.

But with Reg BI on the horizon, industry groups in both New Jersey and Massachusetts are urging lawmakers to pump the brakes on additional rules. They argue that the industry is already scrambling to comply with the SEC standard.

“It seems premature to deem the federal regulation insufficient when it has not yet been fully implemented,” editors at Massachusetts Lawyers Weekly wrote in a Jan. 21, 2020, opinion piece. “This suggests that the best course for now is to hold off on final implementation of new state-level regulations until the full impact of the new SEC rule can be assessed.”

New Industry Standards for Annuity Sales Revealed, Criticized by Advocacy Groups

Ahead of Reg BI’s roll out, a national group of top insurance regulators unveiled a model also aimed at increasing protections for annuity buyers.

But, once again, critics say these standards don’t go far enough.

The National Association of Insurance Commissioners established the suitability standard for the insurance industry in 2010. Revisions began in 2017.

On Feb. 13, 2020, the NAIC approved changes to its Suitability in Annuity Transactions Model Regulation.

Revised text says an insurance salesperson must act “without placing the producer’s or the insurer’s financial interest ahead of the consumer’s interest.”

Under the model, an insurance salesperson must “identify and avoid or reasonably manage and disclose” conflicts of interest and maintain a written record explaining client recommendations.

Supporters say the model rule aligns with Reg BI. Disclosure and documentation, they argue, make the rule tougher than the former suitability standard.
But advocacy groups disagree.

The Center for Economic Justice and the Consumer Federation of America stated in a December 4 comment letter that the model misleads consumers into thinking annuity sellers are now offering best interest recommendations — but the model does not actually require this.

“Moreover, the standard is vague and full of loopholes,” the letter states.

Critics also point out that the revision relies heavily upon disclosures, which consumers seldom read.

It is now up to each state to adopt the new NAIC model, though states are not required to do so.

Industry experts say the state adoption process may take months or years.

Last Modified: February 24, 2020

30 Cited Research Articles

  1. Ballotpedia. (n.d.). State government trifectas. Retrieved from https://ballotpedia.org/State_government_trifectas
  2. Bell, A. (2020, February 13). Full NAIC Adopts Annuity Suitability Model Update. Retrieved from https://www.thinkadvisor.com/2020/02/13/full-naic-adopts-annuity-suitability-model-update/
  3. Center for Economic Justice. Re: Draft Revisions to the Suitability in Annuity Transactions Model Regulation. (2019, December 4). Retrieved from https://consumerfed.org/wp-content/uploads/2019/12/Best-Interest-Standard-Model-Suitability.pdf
  4. Croce, B. (2019, April 4). Maryland fiduciary standard proposal rejected in committee. Retrieved from https://www.pionline.com/article/20190404/ONLINE/190409900/maryland-fiduciary-standard-proposal-rejected-in-committee
  5. Galvin, W.F. (2019, June 14). Preliminary Solicitation of Public Comments: Fiduciary Conduct Standard for Broker-Dealers, Agents, Investment Advisers, and Investment Adviser Representatives. Retrieved from https://www.sec.state.ma.us/sct/sctfiduciaryconductstandard/fiduciaryconductstandardidx.htm
  6. Hilton, J. (2019, July 30). Regulators Debate Need For ‘Prudence’ In Annuity Sales Standard. Retrieved from https://insurancenewsnet.com/innarticle/regulators-debate-need-for-prudence-in-annuity-sales-standard
  7. Institute for the Fiduciary Standard. (n.d.). About. Our Vision, Mission and Objectives. Retrieved from https://thefiduciaryinstitute.org/about/
  8. Kelly, B. (2019, March 13). Morgan Stanley threatens to pull out of Nevada over state’s fiduciary rule. Retrieved from https://www.investmentnews.com/article/20190313/FREE/190319968/morgan-stanley-threatens-to-pull-out-of-nevada-over-states-fiduciary
  9. Kincade, J. & Lacy, J. (2020, January 20). It’s the Final Countdown: Being Prepared for Regulation Best Interest. Retrieved from https://www.natlawreview.com/article/it-s-final-countdown-being-prepared-regulation-best-interest
  10. Longo, T. (2018, November 26). Insurance Agents Sue To Overturn New York’s Best-Interest Reg. Retrieved from https://www.fa-mag.com/news/insurance-agents-sue-to-overturn-new-york-s-best-interest-reg-42032.html
  11. Manganaro, J. (2019, July 17). Industry Demands Delay of New Jersey Fiduciary Regs, Deference to SEC. Retrieved from https://www.planadviser.com/industry-demands-delay-new-jersey-fiduciary-regs-deference-sec/
  12. Manganaro, J. (2019, August 8). New York Trial Court Endorses Fiduciary Standard for Insurance Sales. Retrieved from https://www.planadviser.com/new-yorks-top-court-endorses-fiduciary-standard-insurance-sales/
  13. Manganaro, J. (2019, June 5). SEC Votes in Approval of Final Regulation Best Interest, Form CRS. Retrieved from https://www.planadviser.com/sec-votes-approval-final-regulation-best-interest-form-crs/
  14. Massachusetts Lawyers Weekly’s Editorial Advisory Board. (2020, January 23). New standard for investment advisors is premature. Retrieved from https://masslawyersweekly.com/2020/01/23/new-standard-for-investment-advisors-is-premature/
  15. Napach, B. (2019, August 2). New York State Implements Best-Interest Standard for Annuity Sales. Retrieved from https://www.thinkadvisor.com/2019/08/02/new-york-state-implements-best-interest-standard-for-annuity-sales/
  16. National Association of Insurance Commissioners. (2020, January 28). Executive Committee and Plenary Agenda and Minutes. Retrieved from https://content.naic.org/sites/default/files/call_materials/EXPlenary%20Agenda-Materials_4.pdf
  17. New Jersey Division of Consumer Affairs. (2019, April 15). Rule Proposal. 51 N.J.R. 493(a). Retrieved from https://www.njconsumeraffairs.gov/Proposals/Pages/bos-04152019-proposal.aspx
  18. Pisani, B. (2019, June 6). A breakdown of whether investors are safer after the SEC passes financial protection rule. Retrieved from https://www.cnbc.com/2019/06/06/a-breakdown-of-whether-investors-are-safer-after-the-sec-passes-financial-protection-rule.html
  19. Rostad, K. (2019, May 14). Reg BI looks strong, if you squint just right. Retrieved from https://thefiduciaryinstitute.org/2019/05/14/reg-bi-looks-strong-if-you-squint-just-right/
  20. Russell, J.A. (2019, August 13). Office of Nevada Secretary of State. Email to Annuity.org.
  21. Schoeff, M. (2019, June 17). New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension. Retrieved from https://www.investmentnews.com/article/20190617/FREE/190619935/new-jersey-fiduciary-rule-pressure-leads-to-public-hearing-comment
  22. Schoeff, M. (2020, January 2). State insurance commissioners poised to approve annuity sales best interest rule. Retrieved from https://www.investmentnews.com/state-insurance-commissioners-annuity-sales-best-interest-rule-175847
  23. Securities Industry and Financial Markets Association. (2019, June 5). SIFMA Statement on the SEC’s Final Regulation Best Interest Rule. Retrieved from https://www.sifma.org/resources/news/sifma-statement-on-the-secs-final-regulation-best-interest-rule/
  24. State of New York Supreme Court. (2019, July 31). New York Supreme Court Fiduciary Decision. Retrieved from https://s3.amazonaws.com/si-interactive/prod/planadviser-com/wp-content/uploads/2019/08/08122837/New-York-Supreme-Court-Fiduciary-Decision.pdf
  25. U.S. Securities and Exchange Commission. (2019, June 5). Comments on Proposed Rule: Regulation Best Interest. Retrieved from https://www.sec.gov/comments/s7-07-18/s70718.htm
  26. U.S. Securities and Exchange Commission. (2019, July 8). Regulation Best Interest and the Investment Adviser Fiduciary Duty: Two Strong Standards that Protect and Provide Choice for Main Street Investors. Retrieved from https://www.sec.gov/news/speech/clayton-regulation-best-interest-investment-adviser-fiduciary-duty
  27. U.S. Securities and Exchange Commission. (2019). Regulation Best Interest: The Broker-Dealer Standard of Conduct. Retrieved from https://www.sec.gov/rules/final/2019/34-86031.pdf
  28. U.S. Securities and Exchange Commission. (2019, June 5). SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals. Retrieved from https://www.sec.gov/news/press-release/2019-89
  29. Welsch, A. (2019, June 14). Massachusetts readies fiduciary rule where SEC wouldn’t. Retrieved from https://www.financial-planning.com/news/massachusetts-proposes-fiduciary-rule-in-wake-of-secs-reg-bi
  30. Wenik, I. (2019, July 18). Advocates clash at New Jersey Fiduciary Rule Hearing. Retrieved from https://citywireusa.com/registered-investment-advisor/news/advocates-clash-at-new-jersey-fiduciary-rule-hearing/a1251422