TO: Trade Organizations with Members in the Independent Distribution Channel
RE: NAIC Best Interest Regulation
We the undersigned are Independent Marketing Organizations (IMOs) and many of us belong to trade organizations or work with companies that belong to trade associations. In the past few months we have been reading about and watching developments at the NAIC concerning “best interest” and scratching our heads why our trade associations seem to be going along with the NAIC proposal and not fighting against warrantless regulations. This has made us worry about the direction of our industry, the future of our businesses, and the protection of our clients.
It is disturbing to us to see proposals emerging from the NAIC which seem to create unnecessary, uncertain, unrealistic burdens on insurance agents which will especially hurt independent distribution and ultimately harm our customers. Together we – as an industry – defeated the DOL fiduciary rule so we are perplexed why the life insurance industry fails to oppose best interest proposals which ultimately appear to do the same thing. These concerns are exacerbated by seeing New York so easily twist best interest into a fiduciary duty with no challenge whatsoever by the life insurance industry.
We need to know whether our trade organizations will be fighting these emerging proposals in order to protect the unique interests of fixed annuity products and independent distribution and the millions of consumers who rely on them.
Our concerns with the latest NAIC Model Suitability proposal are many and run deep.
• No matter how well intentioned, the NAIC proposal plays into a narrative that current fixed annuity sales practices are tainted, when there is no evidence of that and in fact the overwhelming evidence says suitability works and consumers are satisfied.
• The NAIC proposal will do more harm than good. All too often the path to an over-regulated marketplace is paved with supposedly good intentions. The reality here is that the marketplace today is strong and these proposals will harm fixed annuities, independent agents, and consumers.
• The NAIC proposal – whether labeled best interest or not – creates a new standard for agents that is vague and uncertain and will undoubtedly be grist for second guessing regulation and treasure hunting litigation. There is no escaping that saying agents must put client interests ahead of their own – while sounding nice – is a fiduciary duty and will be construed as such by regulators and courts the minute the ink dries on these kinds of regulations. By contrast, ensuring products are suitable and that full and honest information is provided to consumers is the proper standard in a free and competitive marketplace, and it works. The NAIC is trying to fix what isn’t broken.
• The NAIC proposal uses code that probably forces agents to become investment advisors to survive. Saying agents must act with “reasonable diligence, care, skill, and prudence” directly invites interpretation that agents must do what is done in the securities industry by securities agents and investment advisers to meet entirely different standards. But obviously those standards apply to securities brokers and advisers for a reason and are not applicable and do not translate to insurance agents and fixed annuities selling fully guaranteed products. No attempt is made to clarify otherwise in this regulation and so this ambiguity could easily become a trap for well-meaning fixed insurance agents.
• The NAIC proposal makes no effort to recognize the unique structure of independent distribution which – at its heart – is agents and IMOs who work for multiple carriers. As with the DOL rule, the supervision component is built on the broker dealer model, which means insurance companies will likely have to restructure independent distribution systems which could very well be the undoing and demise of independent distribution as we know it.
• Adding “insult to injury” is that the NAIC proposal contains a FINRA safe harbor giving variable agents a free pass. So, while these new standards and requirements fall hard on fixed products and insurance-only agents, variable companies and variable agents are excused as long as they ostensibly comply with FINRA when nobody even knows what FINRA will do, and even more importantly, when there is no justification for perpetuating an outmoded safe harbor adopted when insurance suitability regulation was in its infancy. Everybody with an insurance license should play by the same rules if there is true interest in “harmonizing regulation”. Trade organizations who represent members in independent distribution should vigorously oppose this indefensible exemption that will lead to a very unfair and unlevel playing field.
We believe these proposals do not portend well for the future of independent distribution.
• These proposals, which may be taken in stride by the securities industry, will wreak havoc on our industry for all the reasons mentioned above, forcing drastic change for the fixed industry, turning insurance agents into fiduciaries, forcing insurance agents to become investment advisers, most likely upending our distribution model, and probably forcing many or all of us to sell through broker-dealers who have never shown much interest in fixed products. The ultimate loser will be consumers.
• On top of this, fixed insurance agents who try to survive in such a marketplace will be at great risk because they do not have the inherent advantages of securities arbitration. Instead fixed products and insurance-only agents are always facing the cold winds of litigation against that adversary of free markets known as the plaintiffs’ bar.
• It is imperative our trade associations understand these risks and fight for our unique interests to protect fixed agents and fixed distribution in these kinds of battles that may be framed as pro-consumer but are waged at least in part for the benefit of self-serving constituencies.
We support reasonable improvement in regulation and recognize there is room for improvement but not along the lines originally promoted by DOL and now being advanced by the NAIC.
• We could support enhanced disclosure to help agents and consumers build awareness and work towards better alignment of interests.
• We could support adoption of explicit clarifications to the NAIC rule that remove ambiguity and make clear a far more limited purpose and effect of the regulation.
• We are not naysayers – we are realists – and we know the current proposal will be deeply harmful to our industry, products, and clientele just as was the original proposal by DOL.
We need to understand the positions taken by trade groups that represent our interests and urge all agents and IMOs to ask this same question.
Our impression is many life insurance and annuity trade associations are supporting the NAIC proposal or sitting back quietly. This has allowed the NAIC proposal to creep forward from the Working Group to the A Committee and now a proposal has been released as an “exposure draft”. This is a time of reckoning for those of us in the independent distribution channel. We want to know whether our trade associations will stand up to protect our interests, our businesses, our products, and our clients. It is critically important given the future of our industry, together with our clients’ welfare, is at stake.
Mary Ann Lacey Gray