by Janet Terpening Project Manager | Tailor Made
It’s been nearly two years since the defeat of SEC Rule 151A, and we’ve since seen a growing number of states adopt the NAIC Suitability Model regulations. In the April 2012 edition of NAFA’s e-Pendium monthly e-newsletter, statistics showed that the number of consumer complaints in relation to the sale of fixed and fixed indexed annuities in 2011 were the lowest we’ve seen in the past seven years. Clearly, we have a number of things to celebrate. However, with the events that transpired around recent court cases and state-level issues on the horizon, we are facing new challenges in this post-151A environment. We spoke with Kim O’Brien, president and CEO of NAFA (the National Association for Fixed Annuities), to give you some perspective on the industry today.
Q: With 151A behind us, what challenges do you find our industry currently facing on the federal level?
A: The challenges we face are generally based on three key categories: litigation, legislation and regulation. First, we must keep an eye on the fiduciary standard imposed by Section 913 of the Dodd-Frank Act, which the SEC could liberally use to try and address their perceived regulatory gaps regarding investment advisors and broker-dealer reps. If the SEC were to legislate along these lines, an additional burden could be imposed on this group of producers, not unlike 151A.
We are also participating in a discussion with the Department of Labor (DOL) around the fact that our industry follows a rigorous suitability standard of care whose purpose is to protect consumers regarding the sale of fixed and indexed annuities. We believe that the DOL should not have jurisdiction over IRAs or a change to the definition of “fiduciary” under ERISA (Employee Retirement Income Security Act). We believe instead in retirement savings, consumers’ ability and right to make decisions in their own best interests, and their opportunity to select a professional with whom they want to make those decisions. Obviously, our competitors and detractors haven’t forgiven our industry for our victory over Rule 151A and the federal government is still trying to get its nose back into our tent, but we are cautiously optimistic about our ability to keep them out.
Q: Although states continue to adopt the suitability model standards, why are some issues surrounding these adoptions challenging for producers?
A: We currently have 26 states that have adopted the full model regulations, and we continue to monitor that regularly and dutifully. However, the adoption process can be like a game of telephone. The model is written and shipped out to the states, and each applies the regulations differently to consumers. These interpretations and beliefs get sent to the legislature to promulgate a law, which then moves through the House and Senate before the insurance department can create guidelines and publish them for us to follow. This lengthy and complex process can negatively affect IMOs and agents in the field because, at this point, their obligations may be unclear or inconsistent with other states. Our NAFA legal counsel continues to work on behalf of insurance professionals to simplify the interpretation of these guidelines and, where possible, clarify them and develop consistency with the NAIC Model. We are even working to promote the NAIC Senior Designations Model and state adoption to ensure our producers market and sell themselves accurately and appropriately to potential annuity buyers. NAFA’s Education Committee is working on a Designation Principles Paper to support this initiative.
Q: You mentioned that litigation continues to be a challenge for us. How is that being manifested at the state level?
A: Currently, ambitious state security departments are asserting their authority to assess fees, and one of their primary targets is our products. Specifically, they are focusing their attention on investment advisors because the smaller investment advisors (less than $100 million in assets under management) are under their regulatory authority. However, we are seeing a particular emphasis on those whose business model is focused predominantly (and sometimes almost exclusively) on selling fixed annuities. NAFA encourages investment advisors to make sure their business model follows that of an investment advisory service and to develop investment plans that include an array of products to achieve the objectives of such plan.
The most active case that exemplifies the state security department’s reach into insurance selling is in Illinois. NAFA and its members are very concerned by a brief filed by the Illinois Security Department that states the products sold (indexed annuities) are securities. NAFA filed an amicus brief in this case and has hired a lobbyist to ensure that the insurance status of the product is never in question and that the regulating entity limits its authority to the laws governing the activities of its licensee.
We are also aware of the polarization in Washington [D.C.], and any potential fallout from or opportunity for fixed annuities in this climate. In June, we’ll be heading to the capital to meet with lawmakers and regulators to discuss the issues of annuity tax-deferral, fiduciary standard study by the SEC, and proposals for relief from minimum distribution requirements for qualified annuities. We will present the very strong and consumer-protected standards of review our industry currently has in place, emphasizing our desire to keep compliance healthy but not overly burdensome and the sales process efficient to ensure the best products for consumers. We’ll also be advocating for policy change that benefits retirement planning and consumers’ ability to retire safely with income to last a lifetime.
Q: Although we are facing the variety of challenges you’ve discussed, what are some of the opportunities on the horizon for agents and advisors?
A: With the demise of traditional pension plans, employee matches becoming less significant and individuals spending more time in retirement, there has never been a higher demand for what our products offer. The future is very bright, and the guaranteed lifetime withdrawal benefit riders (GLWBs) are perfect for helping consumers achieve their retirement goals. Additionally, our products are becoming less complicated and more understood by sellers and consumers alike. We saw more indexed and income annuity sales in 2011 than in previous years, and we expect this to only increase as interest rates rise in the years to come. As people seek fewer fees on products upfront and become increasingly comfortable with independent agents and advisors, we expect sales in our market to grow. NAFA has developed a website called FixedAnnuityFacts.org to support its mission to educate, where consumers and members of the media can go to learn more about fixed annuities. We are also partnering with IndexedAnnuityInsights.org to spotlight indexed annuities for consumers. Agents and advisors can direct clients and prospects to either of these sites to find facts, calculators and retirement planning tools to help them better understand the benefits of fixed annuities.
In the meantime, it’s essential that, as we work to educate regulators and insurance departments, agents and advisors in the field continue to be more consciously aware of challenges facing the senior market, particularly those that may affect their decision-making process. As educators and advocates, we can continue helping Americans retire more safely and prosperously while keeping our products safe from unnecessary regulation.
FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12296 – 2012/5/7