As the enforcement dates of the SEC’s Regulation Best Interest (Reg BI) approach, the National Association of Insurance Commissioners (NAIC) is making progress on updating its own suitability standards applying to the sale and service of annuities.
The NAIC is the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. Through the NAIC, state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight.
Since 2003, state insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs. The NAIC’s “Suitability in Annuity Transactions Model Regulation #275” serves as a basis for this regulatory framework.
Model #275 sets forth standards and procedures for recommending annuity products to consumers to ensure their insurance and financial objectives are appropriately addressed. Since the model’s original adoption, the standards have been updated for consistency with those issued by the Financial Industry Regulatory Authority (FINRA). Most states have enacted the updated version of Model #275.
Now, the NAIC appears to be preparing to take another step forward to harmonize Model #275 with the requirements of the SEC Regulation Best Interest. According to the agenda published by the NAIC Annuity Suitability Working Group ahead of its November 5th meeting, the NAIC planned to finish its discussion of the industry comments received on its proposed revisions to Model #275.
According to the Insured Retirement Institute’s (IRI) chief legal and regulatory affairs officer, Jason Berkowitz, all signs are that the NAIC’s revised Model #275 will attempt to hold state-regulated insurance producers to a higher standard, which he says is a “best interest standard.”
“The NAIC engaged in a comprehensive, transparent and inclusive process to revise its Suitability in Annuity Transactions Model,” Berkowitz says. “IRI will carefully review the next iteration of this proposal with our members, but the overall effort to date appears to achieve a workable best interest standard of conduct and a framework for compliance by producers and insurers.”
Berkowitz says the NAIC effort to enhance the current model in a manner that is consistent with the U.S. Securities and Exchange Commission’s Regulation Best Interest, to the extent possible, is the right approach to provide stronger consumer protection.
“As the proposal moves to the next step of the NAIC process, it now includes IRI-recommended language to provide a safe harbor for all insurance producers who are subject to, and actually comply with, equivalent or greater standards such as Regulation Best Interest or the Investment Advisors Act,” Berkowitz says. “This will avoid duplicative compliance requirements for those who already comply with rigorous standards.”