An SEC commissioner appointed by former President Donald
Trump has warned life insurers against assuming that they will be able to pay
sales commissions to sellers of variable annuities.
Allison Herren Lee told life insurance company lawyers
recently that variable annuity issuers will have to comply with the SEC’s
Regulation Best Interest, not just state annuity suitability rules.
State suitability rules based on the new National
Association of Insurance Commissioners model simply require issuers to disclose
producer compensation arrangements that could lead to conflicts of interest,
not to mitigate those conflicts, Lee said, according to a written version of
her remarks.
“Under Reg BI, which applies to the entire range of
securities and includes variable insurance products, the commission came to a
different conclusion about the need for and benefits of mitigation,” Lee said.
“As states continue to adopt and implement the NAIC model, I encourage those of
you in the securities and insurance industries to evaluate your policies and
procedures, to ensure they are consistent with both standards.”
Lee spoke at a life insurance company products conference
organized by the American Law Institute.
An SEC-Industry Dialog
The conference also included sessions on many other topics,
including regulation of registered index-linked annuities.
RILAs are increasingly popular products that are registered
as securities, and expose the holder to some risk of loss of contract value,
but that tie the crediting rate to the performance of bonds and derivatives
held in the issuers’ own general account investment portfolios, rather than to
the performance of assets in the annuity holders’ separate accounts.
Lee noted that there was a dialog between the SEC and the
insurance industry that can help both the SEC and the insurers serve investors
better.
“The variable insurance products offered and sold by those
of you in this room are an important component in the retirement savings of
many Americans,” Lee said.
The SEC wants to make sure that Reg BI lives up to its name,
and that investors get investment recommendations that are truly in their own
best interest, not simply suitable recommendations, Lee said.
What Needs Mitigating
Up till now, Lee said, the SEC has avoided giving the
industry a clear, “bright line” rule about what kinds of recommendations are
subject to an enhanced standard of care. She said the SEC wants to take a
flexible, evolving approach to applying the best interest standard.
But she said the SEC’s exam staff should publish some ideas
about the kinds of mitigation measures that do, and don’t, protect retail
customers.
The kinds of conflicts in need of mitigation include product
issuers’ commission payment levels and a broker-dealer firm’s own compensation
structure, Lee said.
“Firms must mitigate all of these conflicts, and have
various options for doing so,” Lee said. “However, a threshold question to ask
about an incentive is whether it should be created or permitted at all.
“Sometimes the best mitigation is simply to avoid from the
outset an inducement that might cause representatives to put their own
interests ahead of their customers.”
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