The U.S. Securities and Exchange Commission (SEC) has tested life and annuity policy specialists' speed reading skills by posting a final version of its Regulation Best Interest (Regulation BI) regulations.
The regulation packet — which includes he introduction to the regulation, federal regulators' economic impact assessments, and the actual text — takes up 771 PDF file pages.
SEC members approved the text by a 3-1 vote Thursday. Regulation BI is set to take effect 60 days after its official Federal Register publication date.
The original version of the regulation was released last summer. Many insurance groups' policy people welcomed the SEC's work on the project, and the likelihood that the SEC's sales standard will be easier for insurers, distributors, and retail financial professionals to handle than a wave of dozens of different state-imposed sales standards would be. But they acknowledged that they're still analyzing the final text.
Here are 10 points we found that might be of interest to agents, brokers and others who help clients buy life insurance policies and annuities.
1. Disclosing what exactly you'll do for a client is important.
A broker-dealer can decide that it will sell only its own, proprietary products, or products from certain companies, and specific affiliated advisors may have limitations on what they can sell, officials say.
But the broker-dealer and associated persons must tell a retail customer about those limitations, because those are "material facts relating to the scope and terms of the relationship," officials say.
2. If you say you'll do something for a client, you'd better do it.
SEC officials note several times that the National Association of Insurance and Financial Advisors (NAIFA) suggested that broker-dealers should be able to set the terms of their relationships with clients, and that, for example, broker-dealers should be able to agree to whether they will provide specific services, such as portfolio monitoring services.
Broker-dealers can decide whether they will agree to offer services such as monitoring services, but, if they tell clients they will offer such services, then Regulation BI protections will apply, officials say.
3. Standardized compensation disclosure notices should be fine.
Regulation BI sets no specific restrictions on use of sales compensations or other forms of compensation. It does require that broker-dealers use written policies and procedures to identify and disclose on material limitations on their investment recommendations, and any conflicts of interest, officials say.
A broker-dealer must try to reduce the possibility that the conflicts of interest will lead to the broker-dealer making recommendations that put its own interests ahead of the interests of the retail customer, officials say.
A broker-dealer can satisfy the disclosure obligation by using standardized documents, such as a product prospectus, relationship guide, account agreement or fee schedule, officials say.
4. Incentive travel should be fine.
Under Regulation BI, a broker-dealer cannot use sales contests, sales quotas, bonuses or other non-cash compensation to "create high-pressure situations to sell a specifically identified type of security… within a limited period of time, such that the associated person cannot make a recommendation in the retail customer's best interest," officials say.
A broker-dealer does need to develop written policies and procedures to keep any sales incentives programs from putting the firm's interests ahead of those of the customers, officials say.
But a broker-dealer that focuses on selling proprietary products, and discloses that limitation, can promote "the sale of such products through its compensation practices, so long as the incentive is not based on the sale of specific securities or types of securities within a limited period of time," officials say.
