As you know by our comments, we support the standard put forward by Iowa in Section 6 A (1) (d), or something similar, because it provides a benchmark for determining what is meant by so many other undefined and open-ended terms like “best interest”, “best suited”, “care”, “skill”, “diligence” etc. The inherent challenge facing this rule is its use of entirely subjective words with no defined meanings. In absence of clarification or definition, a provision as Iowa proposed is imperative. The provision establishes a standard that any judgement about whether a producer has met the rule’s requirements will be made by reference to what is reasonable for the ordinary producer in a similar circumstance and with similar authority and licensing, while also recognizing it is not necessarily the case “a majority of all insurance and investment professionals could agree that the recommended option was the single best option.”
We are particularly baffled by those who say – in support of the rule – such a standard is not needed because “this is more art than science” and thus it would be difficult from a compliance standpoint to say whether other producers would or would not have made the same recommendation. They go even further, saying this is “more aligned with litigation than a regime based on supervision and regulation.” We hope regulators fully absorb those comments and understand that in saying whether a sale is in the best interest of a consumer can only be resolved through a battle of experts in a courtroom and does not lend itself to regulation. If that’s true and, ironically, we agree with them, then it makes our very point as to why this should not be a regulation in the first place. However, if the NAIC proceeds with this rule, then objective standards are needed so regulators have some point of reference when deciding whether an agent did or did not do what is required of them.
Let us be clear. We have never been supporters of a best interest standard. We think it does not lend itself to regulation and will turn quickly into a litigation trap. We think these very debates prove the rule is far too subjective and carries these risks. Nonetheless, if the rule goes forward, we believe it should stipulate that the standard for meeting the care obligation is one of reasonableness as applied to an ordinary producer. Words can be changed to “peer professional” or “insurance professional” to capture other concerns, but the litmus test must be against what others with similar profiles might have done. Beyond that it must be made explicit that insurance agents will only be compared to other insurance agents and not held to standards required of securities brokers, investment advisers, trustees, or other kinds of fiduciaries. This is the only way to ensure the rule is workable and applied fairly as possible.