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FACC Campaign Welcomes 5th Circuit Mandate – Encourages NAIC to Step Back from Best Interest

mandate vacating the Labor Department’s fiduciary rule.   It is a tremendous victory for the financial services industry and for those who believe more government regulation is not always the answer.  But one must ask whether this will be a short-lived victory if the fiduciary rule is simply replaced with a “best interest” regulation. While some might read the Fifth Circuit decision merely as a rebuke to the Labor Department, the FACC Campaign believes the Fifth Circuit decision stands for a larger proposition.  The Court made clear that agents who sell products are not fiduciaries and should not be held to fiduciary standards.  To do otherwise is contrary to decades of common law as well as highly evolved statutory and regulatory decision-making. The Fifth Circuit saw through the fallacy of the Labor Department’s presumption that it could simply deem insurance agents and securities brokers (who are sellers of products) to be equivalent to investment advisers.  The decision blasted the Labor Department for ignoring the longstanding distinction between an agent and adviser, only the latter of which is a fiduciary based on a unique position of trust and confidence, for whom standards of prudence and loyalty apply under ERISA. In rendering its decision, the Court rejected the paternalism of the DOL, rejected the agency’s arbitrary exercise of power, and rejected the idea that regulators could just turn anybody into a fiduciary.  Now that the Fifth Circuit has spoken, one wonders whether the financial services industry, along with regulators, will heed this message or simply chalk off the decision as a narrow admonishment aimed at the Labor Department.   That would be greatly disappointing and a missed opportunity to redirect regulatory energies in a way that truly helps consumers. From our perspective at the FACC Campaign, “best interest” proposals being considered by the SEC and NAIC are essentially a reincarnation of the DOL rule that embody the same precepts of prudence and loyalty that were rejected by the Fifth Circuit as applied to insurance and securities brokerage sales.  With no disrespect intended towards authors of these “best interest” proposals, best interest is a fiduciary concept, and many have admitted best interest is just another means by which to impose fiduciary standards and duties on agents, even if not called such.  This is exactly what the Fifth Circuit decision finds at odds with Congressional intent, common law, and (albeit unstated) common sense. Nobody, least of all the FACC Campaign, is saying agents should have no duties or standards.  But those duties and standards must be sensible and fit industry practices to avoid creating artificial, unrealistic, and potentially disastrous effects.  Indeed, insurance agents have critical duties that include, among others, the duty to provide accurate information, the duty to provide full disclosure, and the duty to ensure recommendations are suitable and meet client’s needs and objectives.  But agents are not fiduciaries and should not be saddled with fiduciary obligations that will only beget confusion and litigation, and in the end destroy the vitality of the fixed insurance industry and deprive consumers of high quality fixed insurance products. It would be a shame to squander this gift from the Fifth Circuit, this clear-eyed opinion that finally sees through the malignancy of the DOL rule.  The FACC Campaign urges industry and regulators to take full account of the meaning of the Fifth Circuit decision by not rushing to adopt a best interest standard that potentially eviscerates the Court’s thoughtful (and courageous) holding. Instead, the FACC Campaign hopes regulators will start afresh and look for ways to improve disclosure and transparency without creating artificial standards of care or unrealistic duties that blur real distinctions in the financial services marketplace – which in the end will only suppress competition, unleash rampant litigation, and ultimately hurt consumers. If regulators do that, the holding of the Fifth Circuit will not be in vain, and real victory will be achieved.]]>

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FACC to NAIC: Suitability Works

th Circuit has ruled to vacate, we have turned our attention to other regulatory initiatives, including the work of the NAIC. Let me add that I have personally been involved with fixed annuities since 1990 – and in particular fixed indexed annuities – almost from their inception some 23 years ago.  From where I sit, I am deeply concerned that many of these proposals calling for fiduciary duty and/or best interest could adversely affect the availability of fixed annuity products for consumers and more generally harm the overall financial services marketplace by driving agents from the marketplace, squelching innovation, and ultimately limiting the incredible spectrum of products available today to consumers. I trust most or all of you have already read our comment letter so I will try not to repeat ourselves too much.  Our simple message is the NAIC should “hit the pause button” on any best interest proposal at least until it has been determined how such proposals would truly impact insurance product distribution regulated by state insurance departments.  We fear inertia is carrying these proposals forward without enough meaningful analysis about what it is the NAIC hopes to accomplish, what the real agenda is behind these proposals, and what sales the NAIC thinks occur today that should somehow be prevented under such regulations.  We are not “chicken little” saying the sky is falling but we are here to say that many of the problems found in the DOL rule are found as well in the best interest proposals being considered by the NAIC. We submit “best interest” – which is really equivalent to a fiduciary duty – does not fit the insurance industry.  Best interest and its close cousin fiduciary duty – which is what all these proposals amount to even if they avoid the words themselves – may make sense for services delivered through the securities industry but the securities industry is different.  It has a very different delivery system and provides qualitatively different products and services. These concepts simply do not fit insurance which first and foremost is a product, not a service, and which notably is a guaranteed insurance product backed by an insurance company.  Taking concepts like best interest and fiduciary duty, or whatever it is ultimately called, which never were intended to apply to the sales of insurance products and now applying them based on some ill-defined desire for a uniform standard is not warranted. We want to be clear – nobody is saying the NAIC should sit idle or do nothing.  We believe there is room for improvement to help consumers better understand what products and services are offered by insurance agents and how agents are compensated.  If there is confusion in the marketplace or consumers need more transparency to see what motivates agents, then let’s work on that together. Instead, we ask the NAIC to turn its attention to constructive regulatory improvements in areas of disclosure and compensation practices.  We suggest looking to the existing NAIC Annuity Disclosure Model which may be the right vehicle on which to engraft regulations that truly help consumers understand the agent or advisor’s role, compensation arrangements, licensing authority and potential conflicts of interest so that the consumer is in the most informed position to determine if a recommendation is in their own best interest.  Improvement in those areas would be no small task but would produce real bang for the regulatory buck. We submit that the kind of disclosures we are suggesting deserves fuller and more careful treatment than has so far been accorded to it in the latest proposals. Many are promoting “best interest” purportedly to create a level playing field with the securities industry.  But in fact, it will have the exact opposite effect for at least three reasons. First, we do not have FINRA arbitration to mitigate the impact of this new amorphous standard of care.  Since the proposed drafts avoid defining “best interest,” it will no doubt be litigated, and in our case all affected parties including consumers will be left with expensive and lengthy private actions in state courtrooms. Second, our distribution system and our products are designed differently.  Best interest is designed for the securities industry where a single firm supervises an agent across all sales.  Our agents are independent contractors representing multiple companies and cannot be supervised by one company with respect to product recommendations or compensation when derived from multiple insurers. Third, not all agents who sell annuities also offer investment advisory services.  This insurance-focus adds a level of expertise and product specialty that is advantageous to consumers.  Frankly we think our products are more versatile, more conservative, and better suited for our clients.  But with a nebulous “best interest” standard will we always be second guessed because we are not investment advisers meeting somebody’s idea of what is considered “prudent” or “loyal”. As we said in our comment letter, laws cannot mandate good behavior, but unrealistic legal standards can promulgate a regulatory environment hostile to independent agents and create a platform for ruinous litigation.  We urge the NAIC to step back and reconsider its approach here. Thank you, again, for the opportunity to present our position and for your consideration.]]>