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State best interest annuity rule begins journey to become law

Unlike the Department of Labor’s now-defunct fiduciary rule, the Securities and Exchange Commission’s Regulation Best Interest does not cover transactions involving insurance products.

But variable annuities are often cited by investor advocates when they illustrate the harmful results of financial advisers’ conflicts of interest. The products provide something most investors want — a guaranteed income stream during retirement — but also can be complex and carry high fees that enrich the insurance agents and brokers recommending them.

Earlier this year, the National Association of Insurance Commissioners approved a model regulation that would require investment professionals selling annuities to act in the best interests of their customers. It is designed to strengthen the current annuity suitability rule.

The regulation is similar to Reg BI. It requires insurance salespeople to “identify and avoid or reasonably manage and disclose material conflicts of interest” and maintain a written record explaining the basis for the recommendation. The model rule must now be approved by each state, either through legislation or the regulatory process.

The rule contains a safe harbor that allows registered representatives of broker-dealers who sell annuities to be in compliance with the NAIC rule if they are in compliance with Reg BI.


In May, Iowa became the first state to adopt the measure. And last week, the Arizona legislature approved a bill that implements the model rule.

Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute, said the vast majority of annuity sales are already done in the customer’s best interest. The model rule basically codifies the process.

[More: The pros and cons of state fiduciary rules]

“The change is going to be about intentionality,” Berkowitz said. “Most producers are doing that intuitively. Now it will have to be done more consciously, with more focus on documenting to make sure that the producer, client and the company understand the basis for the recommendation. These are sensible regulations that are designed to protect everyone involved.”


Critics say the NAIC model rule does not impose a legal obligation to act in a client’s best interests.

“The vision that comes to my mind is the wolf in sheep’s clothing,” said Melissa Kemp, executive director of the Financial Planning Association of Greater Phoenix.

The group lobbied against the Arizona legislation. In emails to lawmakers, FPA members asserted that language in the model rule will mislead investors into believing that it provides protection comparable to the fiduciary duty that governs investment advisers’ interactions with clients.

“If you are for a fiduciary standard, this bill doesn’t meet that criteria, and it will be confusing for a consumer,” Kemp said. “We have the same issue with Reg BI.”

When the NAIC first approved the model rule, the IRI called for swift enactment by states. But the group acknowledges that the coronavirus pandemic has slowed things down.

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